Beyond Service Dominant Logic: The Search for an Isomorphic Dominant Logic.
Cinthia B. Satornino
Florida State University
December 14, 2011
MAR 6817: Services Marketing
Beyond Service Dominant Logic: The Search for an Isomorphic Dominant Logic.
ABSTRACT
Goods dominant logic (GDL) has been usurped by service dominant logic (SDL). However,
service dominant logic also fails to meet the requirements of marketing as dictated by the
definition of marketing provided by the American Marketing Association to create value on three
dimensions: market, customer, and social. Grounded in that definition, the different types of
value, and social exchange theory, the authors propose a new isomorphic dominant logic. The
new logic incorporates the economic value espoused by GDL, the customer value that drives
SDL, and the dimension of social value logic (SVL) to define the new isomorphic dominant
logic. The explanatory power and contribution of IDL is demonstrated through examples in
recycling and relationship management.
Keywords: service dominant logic, goods dominant logic, isomorphic dominant logic, social
value,
BEYOND SERVICE DOMINANT LOGIC:
THE SEARCH FOR AN ISOMORPHIC DOMINANT LOGIC
Marketing is struggling with its identity (Reibstein, Day, and Wind, 2009) and purpose. At
the core of this struggle is the lack of articulation about the meaning of marketing. The American
Marketing Association created a new definition in the hopes of encompassing the marketing
discipline and practice in a few words (October 2007). Out of that definition comes the
realization that these few words capture the essence of marketing: Marketing is about creating
value. Not singular value for a one privileged group but for all stakeholders. The objective of the
current work is answer the following question: How does marketing creates value? The
exploration of this research question leads to the assessment of the current dominant paradigm in
marketing research, Service Dominant Logic. The assessment finds that the current dominant
logic fails to account for all marketing phenomenon. To address the shortcoming in the current
dominant logic, a new logic is proposed.
Service Dominant Logic (SDL) has ruled marketing thought since its introduction in 2004 by
Vargo and Lusch. A search for “Service Dominant Logic” on Google Scholar calls up over 2,400
articles. Vargo and Lusch made, and continue to make, valuable contributions to marketing
practice and theory development through the insight gained from SDL. But, in dominating
marketing research, does the pendulum swing too far? Are academics justified in completely
abandoning the insights from the manufacturing perspective, what Vargo and Lusch (2004)
called “Goods Dominant Logic” that permeated early marketing research? However, the present
study challenges the dominant of SDL as the theory of marketing research and revisits Goods
Dominant Logic (GDL), as well as the emerging Social Value Logic (SVL) that focuses on
sustainability, corporate social responsibility and corporate citizenship (Haanaes, Arthur,
Balagopal, Teck Kong, Reeves, Velken, Hopkins, and Kruschwitz 2011; Maignan and Ferrell
2004).
Grounded in the definition of marketing provided by the American Marketing Association,
the present study calls for the reevaluation of some of the foundational premises of SDL
proposed by Vargo and Lusch (2004). The objective is to develop a balanced and isomorphic
logic. Isomorphism refers to similarities in entities of different ancestry that result from
convergence. Thus, “isomorphic” is a way to describe a theory that focuses on the similarities
inherent in the unique and independently derived theories of value creation in the firm.
Specifically, the objective of this study is to reconcile SDL, GDL and the emerging SVL using
the theoretical definition of value coupled with the established definition of marketing, to
propose a new, isomorphic logic. The theoretical contribution offered by the present work is a
reconciliation of two opposing views and the addition of the third perspective of the firm. In
other words the present study reconciles the economics based goods dominant logic and the
relationship based service dominant logic and integrates the emerging “firms as social citizens”
based social value logic to develop a more comprehensive isomorphic logic.
The current paper first defines GDL and SDL and provides a historical account of each
stream of research. Then the study explores the dangers of a narrowly focused adherence to SDL
and the failure of SDL by providing examples where SDL fails to explain certain marketing and
strategy phenomenon. The study examines the implications of SDL for various strategies and
asserts that the SDL approach does not always identify the most appropriate strategy. The study
then introduces Social Value Logic as the missing dimension of marketing logic that, in
combination with SDL and GDL, better explain current marketing practice. A new and dynamic
isomorphic dominant logic (IDL) is then proposed based on an understanding of where the point
of value creation is found and the integration of SDL, GDL and SVL. Finally, a conceptual
model of the proposed IDL is identified and a research agenda is proposed to assists researchers
in exploring and testing the insights offered by IDL.
THEORETICAL DEVELOPMENT
Historical Perspective on SDL and GDL: Vargo and Lusch. Vargo and Lusch introduced
service dominant logic (SDL) in their seminal article in the Journal of Marketing in 2004. The
authors answered the call of marketing scholars to “break free” from the dominant logic of that
time; specifically, goods dominant logic (GDL) (Shostack 1977). Vargo and Lusch (2006)
proposed that marketing research had fragmented, giving birth to several streams of research
outside the realm of GDL. Examples included relationship marketing, quality management,
market orientation, supply and value chain management, resource management, and network
analysis. The authors further argued that the separate streams of research indicated that GDL was
insufficient to explain the marketing discipline and belied the innovative and strategic purpose of
marketing practice.
The literature, as well as the current study, embraces both the critique of GDL and the value
SDL. The present study does not argue the value of SDL and its contributions to the
understanding of the firm. In fact, the present study supports the arguments made by Vargo and
Lusch (2004) that marketing needs a new isomorphic paradigm. However, the present study
proposes that the SDL paradigm inadvertently subverts unique insights offered by the GDL
paradigm. Instead, the current study suggests a compromise between the two extremes of logic in
addressing firm and customer level phenomenon. The literature suggests that the core distinction
between the service and goods dominant logics lies in how value is defined (Vargo and Lusch
2006). By focusing on the point where value is created, researchers can begin to understand
where and how GDL and SDL can be reconciled and transformed into an isomorphic dominant
logic. In the next section, the distinction between GDL and SDL in defining how value is created
is discussed further.
WHAT IS VALUE?
SDL suggests that value is only found in the use of an offering and that tangible physical
goods are simply carriers of service (Vargo and Lusch 2004). Vargo and Lusch’s definition of
value implies that goods have no value until the embedded service is manifest. The assumption
made by Vargo and Lusch implies that goods have only extrinsic value (Zimmerman 2010). That
is, extrinsic value is the value not found “in and of itself” (in a focal object), but rather “for the
sake of something else” (Zimmerman 2010). Thus, SDL implies that the value of goods is
extrinsic (in their use) as opposed to intrinsic (inherent in the physical characteristics of a good).
In contrast, intrinsic value does not depend on “something else;” rather, intrinsic value
assumes objects have value onto themselves (Zimmerman 2010). The definition of intrinsic
value corresponds with the Good Dominant Logic perspective, which focuses on manufacturing
processes. GDL supports the idea that objects have value in and of themselves and suggests that
firms seek to maximize the value of the good by controlling factors of production and
minimizing costs during production and distribution processes (Vargo and Lusch 2004).
Perhaps the best way to exemplify the difference between intrinsic and extrinsic value is
through illustration. If a customer (or a firm) owns a piece of wood, does the wood have value in
and of itself as a piece of wood? Or does the wood have value only when used by a customer (or
firm) to build something, or to burn, or for some other purpose. Those who believe the wood has
intrinsic value suggest that the wood has value as simply a piece of wood. Goods dominant logic
supports the view that goods have value in and of themselves (Vargo and Lusch 2004).
Conversely, those believing there is only extrinsic value in objects suggest that the wood has
value only when it is used for something else. SDL supports the later view. That is, SDL
suggests that goods only have value only when used (Lusch and Vargo 2006). Synthesizing these
perspectives on value creation, the current study asserts that both GDL and SDL offer insights
that are revealed and maximized only when combined into an isomorphic dominant logic where
the value of a good is assumed to be both intrinsic and extrinsic. To further examine the value of
an isomorphic approach, it is important to understand both how value is defined historically in
the marketing discipline and the evolution of marketing thought to the current dominant logic
(i.e. SDL).
Value from a historical perspective. Most early definitions of value are derived from the
economics literature, primarily exchange theory (Newman 1964). The work of early marketing
scholars focuses on improving value by identifying ways to manage manufacturing processes
that lower the costs of production and securing natural resources (Vargo and Lusch 2004). For
example, one of the most prevalent theories in marketing strategy, the resource-based view of the
firm (RBV), is derived from classic economic exchange theory. Proposed by Barney (1991),
RBV suggests that sustainable competitive advantage is found in the characteristics of a firm’s
resources that make them rare, inimitable, non-substitutable, and valuable. RBV implies that,
because of these charactersitics, resources have value. Supporting the concept that goods have
intrinsic value is the assertion by Dierickx and Cool (1989) that critical resources are
accumulated rather than acquired, which implies a perspective on value creation.
The concept of asset accumulation suggests that in the GDL approach, the value of a
good is embedded in the physical good (Vargo and Lusch 2006). SDL shifts the focus away from
intrinsic determinants of value. Specifically, Vargo and Lusch (2004) suggest that a new logic is
needed that embraces the emerging service marketing phenomenon. The authors propose that
service dominant logic (SDL) fulfilled the need for a new logic. In proposing SDL, the authors
embrace the concept of value creation at the time of use. In other words, from the SDL
perspective, the creation of value is the result of a trade-off during consumption (Payne and Holt,
2001).
The SDL definition of value is supported by Constantin and Lusch (1994) who
specifically define value as what a customer finds when an operation or act is performed on a
good to produce “an effect.” The “effect” referred to by Constantin and Lusch is interpreted by
Vargo and Lusch (2004) to mean a service performed for a consumer to meet a need. In other
words, Vargo and Lusch (2004) define value as being co-created by a customer upon use of a
physical good. However, to define the value of a physical good as only extrinsic value implies
the good has no intrinsic value. The restrictive nature of this definition has negative
consequences. In the next section, these negative implications are explored.
NEGATIVE IMPLICATIONS OF SERVICE DOMINANT LOGIC
“We destroy the beauty of the countryside because
the unappropriated splendors of nature have no economic value,”
~ John Maynard Keynes, 1936
While SDL offers significant insight for marketing thought, there are challenges in
suggesting that the logic should indeed be dominant. For example, Vargo and Lusch (2004)
define knowledge as a key resource that is applied for the benefit of another entity. Specifically,
Vargo and Lusch (2004) “define services as the application of specialized competences
(knowledge and skills) through deeds, processes, and performances for the benefit of another
entity or the entity itself” (p. 2). Vargo and Lusch (2004) criticize the position that a firm’s (or
nation’s) factors of production are considered valuable in and of themselves and that these
factors, or resources, are something to be captured by a firm. However, if a firm has no resources
(e.g. natural resources, work-in-progress, or finished goods), their knowledge, without resources
to act upon, becomes useless. Vargo and Lusch do not address the paradox that is presented by
service (the application of knowledge and skills) in the absence of raw goods in the development
of SDL.
By contrast, the present study asserts that resources in the form of physical goods have
value in and of themselves based on the potential to be used and physical goods’ intrinsic value
and extrinsic value interact to determine the value of resources. Vargo and Lusch (2004) use
silica and the invention of microprocessors to make a case that physical goods (e.g. silica) are
only valuable in use. However, without silica, the knowledge of how to use this physical good to
create microprocessors is useless. This implies that silica contributes unique and intrinsic value
to the end product. GDL implies that there is value in the physical good (silica) that is increased
through the production process. SDL implies that only the microprocessor, which contains silica,
has value. The present study asserts that silica has both intrinsic and extrinsic value.
Given that silica is used in the production of glass, optic fibers, cement, and other goods
used by consumers, an isomorphic theory suggests that silica, as a raw good, has a high level of
intrinsic value. As the silica is processed to develop an end product, the present study argues that
the silica’s value shifts from completely intrinsic to a mix of intrinsic and extrinsic. As the use of
the end product becomes more specific, the silica becomes more of a means to an end than a
product with value in and of itself. Using Dierickx and Cool’s (1989) asset stock accumulation
concept, a firm with a stock of silica has a valuable resource based on the fact that it is silica. In
addition to the silica example, there are other examples where SDL fails to account for value.
As further evidence of the need for isomorphic logic, the present study looks to answer a
fundamental question. If physical goods exist only to render service, then why are consumers
compelled to own goods? Instead of purchasing goods, why wouldn’t consumers rent all goods
to extract embedded services? Given that consumers choose to purchase and own products, logic
suggests there is value in owning goods beyond the service embedded in the physical good. The
previous questions suggest that both GDL and SDL offer insight for marketing theory, but each
provides an incomplete view. First, each provides evidence of only one type of value. GDL
adheres to a model of value as totally intrinsic and SDL suggests that value is only extrinsic.
Additionally, both fail to account for residual value and the implications for sustainability
practices. The definition of marketing charges the discipline with the creation of customer and
stakeholder value to be sure. However, it also clearly assigns the duty of creating social value to
marketers. This residual value has yet to be explored under a logic paradigm. Instead, the
emerging practice and study of sustainability provides the last dimension of the marketing
discipline and the last link to building an isomorphic logic. In the next section, the residual and
residual value of product offerings will be introduced, and the link to social value, the third
dimension of the isomorphic logic, will be discussed.
SOCIAL VALUE LOGIC AS THE MISSING DIMENSION
According to the American Marketing Association, the definition of marketing is:
Marketing is the activity, set of institutions, and processes for creating,
communicating, delivering, and exchanging offerings that have value for customers,
clients, partners, and society at large. (AMA, October 2007)
Creating, communicating, delivering, and exchanging offerings rings of the well-known “4Ps” of
marketing: Product, Promotion, Place and Price. The activities, set of institutions, and processes
are the internal and external partnerships and processes that facilitate the fulfillment implied by
the 4Ps. These concepts are well established and researched in the marketing literature. However,
the final part of the definition, where value comes into play, remains uncertain. Firms and
researchers struggle to finalize the role of marketing in the firm (Bartels 1974; Reibstein, Day,
and Wind 2009).
It is in this uncertainty where the present study finds support for the three dimensional
isomorphic logic proposed. Service dominant logic provides insights in creating customer value
(Vargo and Lusch 2004, Lusch and Vargo 2006, Vargo and Lusch 2008). For stakeholders
interested in profitability and market outcomes, goods dominant logic provides guidelines and
insights on accomplishing those goals (Dierickx and Cool 1989; March 1991). However,
offerings that have value for society represent an emerging area of study.
The charge to create social value remains isolated from explorations of value creation.
While corporate social responsibility is not a new construct (Carroll 1999), few studies examine
the impacts on firm performance of corporate social responsibility or its underlying dimensions
of internal CSR (which is concerned with corporate citizenship) and external CSR (which
focuses on sustainability and philanthropy). Of those studies that have examined these
relationships, researchers are finding conflicting results as to how these firm strategies affect
firm performance (Portney 2008).
Some studies demonstrate a positive return on socially responsible strategies (Haanaes,
Arthur, Balagopal, et al. 2011; Margolis, Elfenbien, and Walsh 2008). Others show that
sustainable practices are simply a required cost of doing business in today’s market and do not
contribute to a firm’s performance (Margolis, Elfenbien, and Walsh 2008; Margolis and Walsh
2003). Additionally, some attempt is being made to communicate the social value created by
firms in such ranking systems as the Dow Jones Sustainability Index, the Environmental
Sustainability Index, and the Boston College Corporate Social Responsibility Report. However,
the conflicting results of research minimize the impacts of such attempts, and the attractiveness
of pursuing a social value creation strategy.
The present study challenges the assertion that corporate social responsibility is not
integral to corporate performance. The challenge is grounded both the definition of marketing
and in social exchange theory. Returning to the argument of value creation as the basis for
marketing function, the present work also examines the social value embedded in product
offerings and the relationship with the customer value espoused by service dominant logic, as
well as the market value espoused by goods dominant logic.
In order to meet the objective of the present work, it is important to first define the
constructs of interest. This is no easy task. The conflicting results found in the literature
regarding corporate social responsibility and corporate citizenship may be due in part to the
ambiguous definitions and differences in operationalization. While the controversy rages on, the
present study turned to the seminal articles that defined marketing as exchange and sociological
foundations of social exchange theory to determine the definitions that aligned with the purpose
and meaning of marketing research, social value creation, and the relationship to firm
performance.
The present study challenges the assertion by Margolis, Elfenbien, and Walsh (2008) that
research into corporate social responsibility, and its related dimensions, is only marginally
useful. Instead, based on the value perspective by which SDL and GDL were examined, the
present study proposes that CSR is the link to capturing the third dimension of the proposed
isomorphic logic. The inclusion of a social value dimension is driven by the definition of
marketing as defined by the American Marketing Association (October 2007). Additionally, the
present work returns to fundamental views of marketing as an exchange. Theoretically, support
for social value as a dimension is also found in social exchange theory.
Social exchange theory. Social exchange theory is defined as a series of interactions that
generate obligations (Emerson, 1976). These interactions are interdependent and contingent on
the actions of other actors in the exchange (Blau, 1964). A fundamental principle of social
exchange theory is that there are exchange rules that govern the interactions and serve as
guidelines for engaging in the exchange (Cropanzano and Mitchell 2005). By abiding by the
rules of exchange, the series of interactions lead to the development of trusting and loyal
relationships, as well as commitment between actors.
The primary focus of studies in social exchange theory and organizations has focused on
the rule of reciprocity (Cropanzano and Mitchell 2005). However, there are other rules that have
been largely ignored by the organizational research field (Cropanzano and Mitchell 2005). These
rules expand beyond the transaction based nature of economic exchange. One such rule is the
group gain rule. Group gain implies that benefits of the exchange are combined, and participants
in the exchange realize the benefits from the common pool, regardless of their contribution.
Unlike reciprocity ruled exchanges, this form of exchange is indirect between participants in the
exchange.
In the context of social value, the participants in the exchange are the corporation and
society, rather than the firm and consumers. This exchange is relatively unexplored in the
marketing literature, but it is the genesis for the market, and as such, critically important to
understand and measure. In order for firms to exist, they must gather and deploy resources. Some
of these resources are held by the society in which the firm is embedded (Banerjee 2008).
Society then engages in a social exchange by investing the necessary resources in the firm under
the expectation that firms will create value for society (Banerjee 2008). Blau (1964) defined this
as an exchange different from an economic exchange. Economic exchange involves a specified
obligation. By contrast, the obligations in social exchange are unspecified (Blau 1964).
Additionally, Blau (1964) argues that, unlike economic exchange, the “nature of the return [for
the social exchange] cannot be bargained” (p. 93) and the “benefits involved in social exchange
do not have an exact price” (p. 94) and do not occur in a single transaction. Finally, the firm is
created and engages in activity that is expected to not only create value for the firm and its target
customers, but also for society at large. Figure 1 shows the flow of resources and value creation
that encompass the social exchange and the origin of the obligation firms have to generate social
value.
---------------------Insert Figure 1: Exchanges about here
----------------------
Exchange types. There are three types of exchanges occurring in the exchange cycle. The
first type of exchange, economic exchange between the firm and the market, has been studied
extensively under the GDL paradigm. The first type of exchange, economic exchange, involves
the exchange of economic goods. Economic exchange requires repayment in a specified period
of time and is motivated by self-interest. Economic goods are tangible and address financial
needs (Caponanzora and Mitchell 2005). The exchange rules of reciprocity and rationality drive
economic exchange. The reciprocity rule applies because the focus in an economic exchange is
on the benefits for the self in the exchange, so reciprocal benefits are expected by both parties
(Caponanzora and Mitchell 2005). Additionally, the rationality rule applies because value
maximization is the goal of the exchange (Caponanzora and Mitchell 2005).
With the advent of relationship marketing, the second form of exchange, the relational
exchanges between firms and target customers, has also benefited from scrutiny and study from
the academic realm. Unlike economic exchanges which focus on self-interest, relational
exchanges focus on benefits to the dyad between firm and customers (Caponanzora and Mitchell
2005). Transactions occur over time and previous transactions affect future transactions (Dwyer,
Schurr, and Oh 1987). Participants in a relational exchange receive economic benefits similar to
economic exchange (Caponanzora and Mitchell 2005). However, like social exchange, relational
exchange participants also derive noneconomic benefits, such as personal benefits. Relational
exchanges require effort to maintain the relationship (Morgan and Hunt 1994).
The third form of exchange, the social exchange between society and the firm, remains
relatively unexplored in marketing literature. Social exchanges follows the group gain exchange
rule, and are a form of communal exchange; they are not time specific, but rather open-ended.
The benefits of the exchange are indirect, and socioemotional, or symbolic benefits. The focus of
social exchange is on the benefit to the “other party.” Participants in a social exchange receive
socioemotional benefits such as status (Caponanzora and Mitchell 2005). Socioemotional
benefits are signals that the other is valued and respected (Shore, Tetrick, & Barksdale, 2001).
Table 1 summarizes the differences between economic, relational, and social exchange.
---------------Insert Table 1: Exchange Types about here
---------------Previous and current research exploring exchanges focused on the exchange between the
firm and the market first, and subsequently, the firm and customers. This focus has led to the
development of GDL and SDL, respectively. The social exchange, however, between firms and
society, have received little attention. In the next section, the role of the firm in society is first
discussed and the role of the emerging concepts of corporate social responsibility is defined.
Like the sections discussing SDL and GDL, the objective of this section is to ground the
proposed social value dimension on the relationship to value, and to establish the link between
social value and firm performance/
The role of corporation. If marketing exists to create value, and marketing is the driver of
firm strategy, then it follows that firms exist to create value. Corporations are embedded in and
citizens of society (Banderjee 2008). They wield powerful influences over the governance of the
nation, particularly in countries like the United States. As “citizens” who participate in the
society, they are engaged in a social contract beyond the economic exchange to what Kuhn
(1963) called a “productive” exchange. A productive exchange is one in which where the
transfer of benefits is indirect, and value is produced through social processes. Society expects
firms to engage in productive exchanges. Social norms dictate the value of the benefits gained in
social exchange (Banderjee 2008).
At its core the firm exists as a division of labor, because they are intended to produce
things consumers do not or cannot produce alone. In the exchange of resources between society
and the firm, the separate resources of individuals that comprise society are combined through a
social process (Emerson 1976) and invested in the firm. The firm then converts these collective
resources into a valuable product offering. The present study does not argue that firms’ primary
responsibility is to create market value which should lead to higher firm performance. The
resources invested in a firm by society are done so because the expectation is that the firm will
produce a product offering that is valued by society at large and not just some segment of
society. In other words, in order to justify the opportunity costs that society invested in the
creation of a firm, the firm must also generate benefits that provide value to society at large.
Therefore, firms also are expected to generate social value.
Where SDL and GDL are about embedding intrinsic and extrinsic value in a good or
service, SVL is about maximizing the extraction of that embedded value. Recall that GDL was
about creating and profiting from the intrinsic value in resources. Maximizing the benefits of that
value by extracting the maximum amount of intrinsic value after the good has been consumed is
one dimension of social value creation. Recycling products once they’ve been acquired and used
in an economic exchange is an example of extracting maximum intrinsic value from resources.
Similarly, extrinsic value is co-created by participants in a service exchange. However the
exchange involves more than just the transfer of services. Knowledge about the participants and
their groups beyond the singular exchange or the singular dyad is also generated by the exchange
(Mentzas, Apostolou, Abecker, and Young 2002). Knowledge is a key strategic resource for
future firm performance (Mentzas, Apostolou, Abecker, and Young 2002). Therefore, there is
additional value that is created and transferred. This value is generated above and beyond the
purpose of the exchange and is a result of the collective interaction. As such, this value is defined
as residual value in the present work, because it is “left over” after the knowledge and service
relative to the specific exchange have been transferred. It supported by the Aristotelian logic that
the whole is more than the sum of the parts. While the value embedded in the product offering is
extracted at the time of use, the residual value is transferred and applied to future transactions
between the participants or other similar participants. Maximizing that residual value is proposed
to be a part social value generation by firms. Customer relationship management is an example
of maximizing the residual value of a relational exchange. Firms use relationship management
techniques to understand the needs of other, similar consumers. Similarly, consumers use
previous experiences to inform new decisions. This is a form of maximizing social value.
In the next section, the three logics, GDL, SDL, and SVL are combined to propose a new
isomorphic logic. Then, the examples discussed in the previous section, relationship management
and recycling are examined in the context of the proposed logic and compared to the isomorphic
logic. Finally, the role of the emerging work in corporate social responsibility (and the related
work in corporate citizenship and sustainability) in social value creation are explored.
COMBINING THREE LOGICS TO INTRODUCE AN ISOMORPHIC LOGIC
To resolve the gap in marketing theory left by the exclusion of social value in SDL and
GDL, the present study proposes a third way to view firm performance; this view incorporates
insights from both goods dominant logic and service dominant logic. However, unlike GDL and
SDL, the proposed isomorphic logic incorporates social value logic. Equation 1 provides a
mathematical representation of an isomorphic logic for determining the value of a product
offering. The equation combines both the intrinsic value of the physical goods as proposed by the
goods dominant logic, as well as the embedded services a product offers to solve a customer’s
need, and the social value created by a product offering:
(1) Value (product offering) =
Intrinsic Value (physical good/firm created) +
Extrinsic Value (embedded service/firm and customer co-created) +
Social Value (generated from the exchange/socially determined)
The proposed value equation encompasses both goods-dominant and service-dominant
logics and the addition of the emerging social value logic. For a supplier of raw goods, the
extrinsic value approaches zero and the intrinsic value is the cost of acquisition and accumulation
of raw goods. This is the logic supported by GDL. For a service provider, who exchanges less
tangible product offerings, the intrinsic value of raw good approaches zero while the extrinsic
value approaches the boundary set by customers’ willingness to pay. Finally, both goods and
services generate value in the exchange that is useful beyond the product offering to the
exchange dyad. This value is social value that is exchanged under the social exchange paradigm.
The social exchange is governed by the group gain exchange rule, where the transfer of resources
is both direct and indirect. The product offering’s social value is determined by the societal
benefit provided by the product offering minus the cost to society to produce the good or provide
the service.
In support of the isomorphic logic and its dimensions, Vargo and Lusch (2004) cite the
fragmentation of marketing research as an indicator that the field needs a new dominant logic.
However, SDL has led to similar fragmentation of research streams in marketing. Current works
in corporate social responsibility (CSR) and relationship management (RM) reflect the current
fragmentation in marketing research. CSR and RM also offer the opportunity to compare the
insights from GDL and SDL and highlight the additional benefits offered by the isomorphic
logic.
IDL insights for relationship management. Service dominant logic presents unique
challenges in the context of relationship management that can serve to highlight the benefit of
isomorphic-dominant logic. Viewing an exchange from a relational perspective helps to highlight
the deficit of both existing logics and how the proposed IDL resolves the deficits of singular
goods or services dominant logic. At the core of value creation is a different perspective on the
locus of value creation (Gronroos 2008). The assertion that intrinsic value is created in a
manufacturing process suggests a different relationship management strategy when compared to
the extrinsic value created by service providers and consumer at the moment of exchange.
Service dominant logic implies that value is created at the time of exchange (Vargo and Lusch
2004) and that customers co-create value (Vargo and Lusch 2008). Goods dominant logic
implies that value is created during the production process (Gronroos 2006). With these two
divergent views of the creation of value, practitioners are left with a question as to whom to
allocate resources. Beginning with a definition of relationship management, the present study
demonstrates how IDL offers insight beyond either SDL or GSL.
Relationship management is defined as “all marketing activities directed toward
establishing, developing, and maintaining successful relational exchanges” (Morgan and Hunt
1994). CRM is defined by Payne and Frow (2005) as “… a strategic approach that is concerned
with creating improved shareholder value through the development of appropriate relationships
with key customers and customer segments. Customer relationship management (CRM) thus
focuses on using information to not only understand customers, but to co-create value with them.
The focus of CRM is aligned with SDL and the extrinsic value extracted during use (value-inuse).
In comparison, the goal of supply chain management (SCM) is to create efficiencies and
add value that leads to increased customer satisfaction, which in turn leads to greater profitability
for the firm (Stock and Boyer 2009, p.703). According to the most recent definition of supply
chain management, relationship management is at the core of SCM. “The management of a
network of relationships within a firm and between interdependent organizations and business
units consisting of material suppliers, purchasing, production facilities, logistics, marketing, and
related systems that facilitate the forward and reverse flow of materials, services, finances and
information from the original producer to final customer with the benefits of adding value,
maximizing profitability through efficiencies, and achieving customer satisfaction” (Stock and
Boyer 2009, p.706). This definition aligns itself with the goods dominant logic view of value in
the exchange, which implies intrinsic value in the physical good.
Definitions of both CRM and SCM focus on creating value for the customer. However,
each suggests a different assumption of what value means. The implication is that supply chain
management is focused on maximizing the return from the intrinsic value in the good and
customer relationship management adopts the view that value is extrinsic. IDL suggests that
because value is created at the time of exchange (co-creation of value) for service providers,
customer relationship management is more critical to service providers than to physical goods
merchants. Conversely, because value is created along the value-chain for physical goods
providers, supply chain management is more critical to physical goods merchants than service
providers. Isomorphic logic assumes that pure goods and pure services represent the endpoints
of a continuum, as suggested by Rathmell (1966) and that the determination of value for most
hybrid product offerings is actually a combination of the two. That combination of value
definitions is not addressed by either SDL or GDL completely. However, IDL does offer an
opportunity to define value regardless of the nature of the offering. As such, IDL offers a more
complete and comprehensive view of value and the pricing of product offerings. Additionally,
IDL offers a third view of the firm in the context of relationship management, the social value
perspective.
From a social value perspective, the participants in the exchange dyad are not the firm
and its customers, but rather the firm and society at large. Firms that accept resources from
society are engaged in a social exchange where the benefits are indirect, and the time of return is
unspecified. In return for fulfilling the social contract, society offers legitimacy to the firm.
Organizations legitimacy defined as congruency between the standards implied by a firm’s
activities and the standards of society at large. When there is a discrepancy between the
organizational standards and society’s standards, the threat of sanctions against the firm exist.
Therefore, because the actions of the firm and the norms of society are interdependent, firms
must manage their relationship with society at large as well. To do so, many firms choose to
engage in corporate social responsibility (CSR). Therefore, CSR can be viewed as another form
of relationship management – managing the relationship between the firm and society.
IDL: Insights for corporate social responsibility. Intuitively, corporate social
responsibility, and the related work in corporate citizenship and sustainability, aligns with the
new isomorphic logic. The World Business Council defines corporate social responsibility as‘the
commitment of business to contribute to sustainable economic development working with
employees, their families, the local community and society at large to improve their quality of
life’ (World Business Council, 2005). However, many other definitions of corporate social
responsibility have been offered by various disciplines that build on this general view of CSR
(Banerjee 2008). While the exact definition of corporate social responsibility remains in
contention, it is generally agreed that firms engage in corporate social responsibility to establish
legitimacy (Deephouse and Carter 2005; Dowling and Pfeffer 1975; Neu, Warsame, and Pedwell
1998; Prabhu 1998). Organizational legitimacy is defined as the process by which a firm justifies
its existence within society (Suchman 1995). Firms vary in their sources of legitimacy (Dowling
and Pfeffer 1975). Pragmatic legitimacy is based on the production of a superior good to the
benefit of the market, and is governed by self-interest (Brinkerhoff 2005). Conversely, cognitive
legitimacy is based on the production of needed services that benefit target consumers, and is
grounded in a productive dyadic exchange (Brinkerhoff 2005). However, the third form of
legitimacy is accounted for by the proposed isomorphic logic, normative legitimacy (Brinkerhoff
2005). Nonprofit firms, for example, may not have high levels of pragmatic legitimacy, but excel
in engendering cognitive and normative legitimacy.
Firms vary in the levels of each type of legitimacy they can invest in, and must manage
the perceptions of the firm in order to maintain legitimacy (Brinkerhoff 2005, Mathews 1993).
Low levels of normative legitimacy do not doom a firm to failure, but rather require that these
firms generate high levels of cognitive or pragmatic legitimacy. For example, firms focused on
pragmatic legitimacy forego the ability to invest resources in creating or protecting cognitive or
normative legitimacy. For each type of legitimacy (pragmatic, cognitive, and normative) there
exists a tolerance zone by which a threshold can be violated. There are critical norms that
establish the boundary conditions. The threshold of economic legitimacy is defined by
profitability. For relational legitimacy, customer satisfaction determines the threshold. For social
legitimacy, social norms establish the boundaries. An example of a boundary conditions
established by social norms is the existence of labor laws. Laws define extreme boundaries of
social norms that have been codified, and violations of these laws have regulatory repercussions.
Norms that have not been codified into laws are still enforced by social pressure (Banerjee
2008).
Gaining legitimacy is a challenge for firms, and firms take action to ensure their
continued legitimacy (Banerjee 2008, Brinkerhoff 2005). Many businesses are criticized for the
disparity between their standards and activities and current social norms, which threatens their
legitimacy, or their right to exist (Banerjee 2008). However, it is critical for firms to create and
maintain legitimacy to survive (Hearit 1995).
Legitimacy is a by-product of an exchange, and “exists as a symbolic representation of
the collective evaluation of an institution, as evidenced by both observers and participants and,
perhaps most convincingly, by the flow of resources… resources must have symbolic import to
function as value in social exchange.” (Hybels 1995, p.243). The social exchange that underlies
the social value dimension of IDL occurs when society invests collective resources in a firm,
which in turn obligates the firm to create social value. When the firm meets the implicit
expectation to create social value, the firm earns normative legitimacy. The pursuit of normative
legitimacy leads firms to engage in CSR (Kaplan and Ruland 1991). By creating social value
through CSR initiatives, firms earn or protect their social legitimacy. Perhaps the best way to
illustrate how legitimacy and social norms interact in corporate social responsibility is through
example.
An example of the insights offered by IDL in the realm of corporate social responsibility
is in the examination of recycling practices. SDL implies that physical goods have no value
beyond the rendering of the service embedded in it. Therefore, Vargo and Lusch (2004) state that
an unsold good has no value except the value that is tapped when the embedded service is
extracted. Does a sold good have value after the inherent service is extracted? If not, and the
material that makes up the physical good has no value outside the service it renders, then why
recycle, reuse, or repurpose? According to material flow analysis, there is residual value in the
obsolete material that can either go to waste or be recycled (Bainbridge 2005). From where did
that value come? That question remains unanswered by SDL as does the question of the value of
goods that are not used for intended purposes.
Drawing from Pirsig (1974) in Zen and Motorcycle Maintenance, does the remnants of a
drink can used as a shim to hold tight the fastener for the brake or clutch handle on a motorcycle
have less value than the chrome shim specifically designed for this purpose and purchased at an
accessory shop? Though both GDL and SDL suggest that value is completely consumed by the
use of the product offering, IDL suggests that there is residual value after the exchange of the
physical good or the extraction of the embedded service. Social legitimacy is given when the
firm acknowledges and maximizes the benefits of this residual value by creating social value.
In the next section, the conceptual model of isomorphic dominant logic is proposed.
Then, discussions thus far regarding the different types and dimensions of value and exchanges
are synthesized. Finally, the relationship between these dimensions and firm performance are
defined to complete the IDL framework.
IDL: THE CONCEPTUAL MODEL
The proposed isomorphic dominant logic is grounded in value and social exchange theory
(Cropanzano and Mitchell 2005, Emerson 1975). IDL is designed to encompass the current
dominant paradigm while offering additional insight into the mechanisms that drive firm
strategies and impact performance. IDL suggests a three dimensional view of firm performance
based on the three types of value firms create: customer value, market value, and social value.
Additionally, IDL provides a dynamic view of social value, by recognizing the link between
social value and the firm performance and explains the reason why conflicting results plague
CSR literature. Each of the benefits outlined above are discussed in detail.
-------------Insert Figure 2: The IDL Conceptual Model about here
-------------The links in goods dominant logic and service dominant logic are well established in the
literature (Vargo and Lusch 2001, 2008a, 2008b). Economic exchange is at the core of goods
dominant logic, and generating value for the “owners” (i.e. stockholders) is the primary goal. By
contrast, in service dominant logic, relational exchange is the focus is gaining benefits for both
members of the firm-customer dyad is the primary goal (Vargo and Lusch 2004, 2008a, 2008b).
One of the unique contributions of the IDL framework is the social value logic (see Figure 2) and
the proposed indirect effects on firm performance. Additionally, IDL provides a dynamic view of
the interaction between the social value and firm performance. These relationships are discussed
in the next section.
Social exchange and social value. Firms are embedded in society, and as such, exchange
resources with the society in which they are embedded in order to create product offerings
(Banerjee 2008). These resources are in the form of human, physical goods, technological, and
knowledge capital (Barney 1991). Firms combine these resources in order to establish a position
in the market that provides sustainable competitive advantage (Barney 1991).
From their market position, firms combine resources to generate product offerings that
meet consumer needs and wants (Bower and Christensen 1996). Consumers are both members of
the consumer segment the firm seeks to service, and the society from which the resources were
extracted. While the relational and economic exchanges focus on serving the needs and wants of
the consumer (Vargo and Lusch 2004), social exchanges are focused on meeting the needs and
wants of the individual as a member of society (Emerson 1975). The individual considers the
tradeoff between what the firm is offering and what other offerings could have been provided by
an alternate firm or resource configuration. Therefore, the offering embodies not only the cost of
the product offering to the customer, but the opportunity cost to society of what the society could
have received from an alternate concentration and configuration of resources. Therefore, IDL
proposes that
Proposition 1: Engaging in social exchange obligates the firm to generate social value.
Social value and customer value. Customers are not just customers. Rather, they are also
members of the society at large. Consumers, as members of society, have needs and wants
beyond those of the satiated by the product offering. Smith (2003) showed that 88% consumers
are likely to buy from socially responsible companies. Additionally, Jones (1997) found that
76% of consumers are willing to switch to companies that showed concern for communities.
This implies that consumers make decisions not just as consumers, but as members of society,
and that society at large expects a return on the investment of resources in the form of social
value. By creating social value, firms meet the needs of consumers as both consumers and
individuals. Therefore, IDL proposes that
Proposition 2: When firms create social value, they enhance customer value.
Social value and market value. Conversely, the link between social value and market
value are not one of enhancement, but rather one of cost. Resources invested by the firm in
generating social value have the opportunity cost of pulling resources away from activities that
generate economic value (Emerson 1975). Therefore, IDL proposes that
Proposition 3: When firms create social value, they detract from economic value.
Firm performance and social value. The unique contribution of IDL is in connecting firm
value to the creation of social value. Many previous studies looking at the link between firm
performance and social value examine the linear relationship (i.e. CSR initiatives  firm
performance) (Banerjee 2008). This narrow view of social value generation may account for the
conflicting results in the social value literature that encompasses CSR, corporate citizenship and
sustainability research streams (Ennen and Richter 2010). By contrast, the present study proposes
that that there the relationship between firm performance is not linear. Instead, IDL proposes that
the relationship between the creation of social value and firm performance is a complex circular
exchange (Bagozzi 1975). A complex circular exchange involves a system of mutual
relationships between three or more actors (Bagozzi 1975). There is at least one direct exchange
between each actor, as well as indirect links to one or more of the actors engaged in the exchange
(Bagozzi 1975). Many marketing exchanges involve these types of exchanges, which involve
coordination of activities and individuals, groups and firms.
While most studies of exchange focus on the economic exchange between firm and
customer, and the firm and the market, the justification for social value as a dimension of IDL is
found in the exchange between society and the firm for the resources to create the product
offering. The exchange links between the firm, consumers, the market, and society are, in reality
it is a closed complex circle of exchange where resources are extracted from society in order for
the firm to create the product offerings that customers exchange for money (which represents
their labor resources) and the economic market rewards the firm for the higher value of their
product offering. When closing the circle in the complex exchange, a clearer picture of the value
of product offerings emerges. However, with the linear perspective currently employed in the
social value literature, there is a link missing that is critical in understanding the connection
between firm performance and social value. Perhaps, the best way to demonstrate the initiating
exchange between society and the firm is in by illustrative example.
Let’s return to Vargo and Lusch’s (2004) arguments about silica. The previous argument
establishes the difference between the view of value as intrinsic, and the view of value as
extrinsic. Now, in relating the example to the third dimension of social value, it is important to
examine where social value is created or embedded in the object. Consider the following
example: two semiconductors made from silica – each equally as powerful, reliable, etc., and
each meeting a customer needs. However, one semiconductor was created using environmentally
responsible practices. It is designed to make recycling easier for the user. It was produced by a
corporation known to engage in community related initiatives, and provide a safe workplace for
their employees. In other words, the firm used the societal resources that were exchanged in the
social market place responsibly. The other is made without consideration for or promotion of any
of these social dimensions. All else being equal, the semiconductor that was created using
socially responsible practices is obviously the superior option. This demonstrates the social value
dimension of IDL. Therefore, IDL proposes that
Proposition 4: As firms increase performance positively, their obligation to society, and
therefore, corresponding pressure to generate social value, increases.
This proposition is supported in the literature. Dowling and Pfeffer (1975) explored why
some firms engage in activities and processes to earn and protect their legitimacy more than
others. The authors posited that “while legitimacy is a constraint on all organizations, it is likely
that it affects some organizations more than others. This is because (1) some organizations are
considerably more visible, and (2) some organizations depend relatively more heavily on social
and political support. We would therefore hypothesize that organizations that are larger, and
organizations that receive more political and social benefits would tend to engage more heavily
in legitimating behavior” (p. 133). If larger organizations that have received more resources than
other firms are more likely to engage in legitimizing actions, the implication is that they face a
greater threat of sanctions. That greater threat results from the expectation by society that these
firms, which have “cost” society more of their resources relative to others, have a larger
obligation to generate social value.
The relationship between exchange types. Finally, because resources are limited,
dedicating resources to engage in a particular type of exchange means fewer resources available
to engage in another type of exchange. Firms can also excel at particular types of exchange, such
as economic exchanges that result in higher profit margins, more so than the other two types of
exchange. These are examples of boundary conditions that enforce a tradeoff when engaging in
exchanges. Therefore, IDL suggests that
Proposition 5: There is a correlation between the exogenous exchange types. Therefore,
firms must determine a strategy for managing the tradeoff in generating the three
dimensions of value
DISCUSSION
The present study proposes a new framework for examining firm performance that
incorporates social, as well as economic and relational value. Previous paradigms, specifically
goods dominant logic and service dominant logic, have focused on only one of the three
dimensions of value. However, marketing has proffered a definition that charges firms and
markets with creating not just one, but all three types of value. This new framework, called
isomorphic dominant logic, morphs the three forms of value into a single framework.
Additionally, it provides a dynamic view of the interaction between firm value and social value.
In 1975, Bagozzi proposed that “any theory of marketing based on exchange must satisfy
two broad requirements. First, the structure of exchange must be specified. That is, the social
actors, their relationships, and the media of exchange must be identified.” Bagozzi also asserted
that “the theory should allow for positive as well as negative actions on the part of either or both
actors in the exchange.” In the case of IDL, the social actors are individual consumer, the firm,
the market, and society at large. Their relationships are defined as complex and circular. Finally,
the media of exchange is identified as the firm promotion strategies, market reaction, and social
sanctions. IDL also allows for both positive and negative actions on the part of the actor.
Bagozzi (1975) goes on to assert “more importantly, the theory must specify the
underlying cause and effect relationships that determine the outcomes of the exchange. IDL
proposes that the investment of resources by society is the causal mechanism by which firms
obligate themselves to creating social value. When firms accept social resources, they engage in
a social exchange. This social exchange leads to the obligation to generate social value. That
social value enhances consumer value, but detracts from market value. Both market and
consumer value have direct effects on firm performance. These diametrically opposed indirect
effects on firm performance by social value explain the conflicting results in the literature on
corporate social responsibility, corporate citizenship, and sustainability. The previous discussion
leads to the conclusion that IDL meets the requirements outlined by Bagozzi (1975) to qualify as
a marketing theory.
Additionally, IDL contributes to theory by resurrecting the insights offered from goods
dominant logic and incorporating the emerging social value perspective to develop a more
complete logic than the current paradigm. The theory developed in this paper reconciles the
discrepancies and gaps left by both goods- and service-dominant logics and the exclusion of
social value logic. IDL suggests that marketing researchers must account for tangible, intangible
and social components in product offerings when determining value and recommending
strategies to practitioners.
IDL contributes to practice by reconciling the challenges in implementing service
dominant logic in processes designed to create value in physical goods along the supply chain,
while still allowing for the benefits gleaned from SDL. A particular benefit is the ability to
provide insight for service pricing. Many service organizations use what Monroe called “a naïve
and unsophisticated approach to pricing” (Monroe 1979). IDL offers the opportunity to
incorporate pricing insights form all three dimensions of value. Cost based pricing strategies are
based on understanding the intrinsic value of the physical goods that are consumed either
through the manufacturing process or by the consumer. Combined with this assessment of
intrinsic value, customers’ perceptions of value can be used to assess the extrinsic value of
services. Finally, social value can be incorporated into pricing strategies by using price of goods
to offset social value investments. Pricing strategies for services would be driven by all three
forms of value, rather than just the cost of physical goods (GDL) or the customer perception of
value (SDL).
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TABLE 1: EXCHANGE TYPES
ISOMORPHIC LOGIC
Logic
Goods
Dominant
Logic
Service
Dominant
Logic
Social
Value Logic
Focal
Actors
Orientation
Contract Type
Legitimacy
Type
Exchange
Type
Unit of
Analysis
Measurement
Rule of
Exchange
Firms and
suppliers
Individualistic
Transactional
Pragmatic
Economic
Firm or
product
Profitability
Rationality
Satisfaction
Reciprocity
Social benefit
Group gain
Customer
s and
firms
Firms and
society
Relational
Relational
Cognitive
Relational
Collectivist
Ideological
Normative
Social
Consumer
and
individual
The
exchange
Figures
FIGURE 1: EXCHANGE
Market Value:
Economic Exchange
Market
FIRM
Social Value:
Social Exchange
Customer Value:
Relational Exchange
SOCIETY
Target
Consumers
FIGURE 2: IDL CONCEPTUAL MODEL
Economic Exchange
Create Intrinsic Value
(Goods Dominant Logic)
Market
Value
P2(-)
P5
Social Exchange
Maximize Residual Value
(Social Value Logic)
P1(+)
Firm
Performance
P4(+)
Social Value
P3(+)
Relational Exchange
Create Extrinsic Value
(Service Dominant Logic)
Customer
Value