Your manager has been to a marketing seminar on The Service Dominant Logic. He has asked you to produce a paper on the implications of implementing an SDK programme within the firm embraces both the strategic and tactical implications and the costs and the benefits.
Nowadays, we need to set up strategies and tactics in a new way due to the huge changes happening in both consuming and marketing environment. Due to the more and more important role marketing plays in corporate operation, understanding and implementing strategy from marketing’s view could offer firms a useful means to reconfigure corporate value and management concept. In 2007, the revised definition of marketing by AMA (American Marketing Association) illustrates that marketing is a system of vale transaction in essence.
Briefly, all forms of goods should be regarded as service. Goods are the physical expression of one or more capabilities, and product is the main type that companies offer, while service, according to Vargo and Lusch (2004), is the application of specialized competences (knowledge and skills). Stephen L. Vargo & Robert F. Lusch (2004) also explained that marketing has shifted from the goods-dominant logic (G-D Logic) to service–dominant logic (S-D Logic) which is applicable to all marketing offers (Vargo and Lusch, 2004). They further identified that in fact, all economy is the service economy, and product is just the carrier and physical appearance of the service (Vargo and Lusch, 2004). Apparently, what firms offer is the physical product, but in fact all what they supply is just one kind of service, one solution. Kotler (1977) indicated that the real importance of product to us is not the ownership but the service that we could get from them. Also, there is a growing focus on services in the marketing because service industry dominants the world’s economy nowadays, for example, eighty percent of the current U.S. GDP is derived from the services industry, which employs over 80% of all employees (Ford and Bowen, 2008).
The S-D logic intimates a very different kind of purpose and process for marketing activity and for the firm as a whole: to provide service to stakeholders, including customers, stockholders, and employees (Lusch and Vargo 2006, p. 283). All companies should notice that the real implication of serve-dominant logic is the customer satisfaction not the continual innovation and improvement of products, unless this kind of innovation and improvement is for better satisfying customer needs. Firms’ blind focus on improving products’ quality and technology would let them ignore the change of customer needs, which will keep them away from customers. Whenever companies can have the service-dominant view, they will be more rational to make strategies. Especially when managing production innovation, firms will not only keep an eye on the product itself but develop the production more efficient based on the services need to be satisfied. So under the serve-dominant logic, firms should firstly be customer-oriented, continually satisfy customer needs; then firms should enhance the service consciousness and improve service quality, which is a fundamental approach to attract new customer, build customer satisfaction and cultivate customer loyalty (Brodie and Little, 2006).
A significant change over the 100 years is that customers could actively choose their favourite products from only passively accept corporate product. This is the result of the market competition, is the inevitable phenomenon among the transformation from the sellers’ market to the buyers’ market. In the traditional product times, corporate implement the market-and-sell producing value, producers and consumers are completely separated (Baker, 2003, P454). In the past, companies blindly manufacture, ignoring whether or not customers will accept, what they only care is selling products out for profit. However, this method isn’t effective anymore because current customers have a lot of alternative choices, part of them are even finicky, they will only choose the product and service satisfying their needs, they will not waste any interest on anything they don’t like. In consideration of this situation, more and more companies become smarter. They abandon the obsolete production concept, turning to use the sense and response marketing view as the guide, put customers in the core position of the corporate operation. More than that, firms start to involve customers in the process of product design, producing, evaluation. During the whole process of value creation, customers is no longer a passively accepter, but be regarded as the co-producer. The key element of value creation is to cooperate with customers (Normannand Ramirez, 1993).
Thus it can be seen that, customer participation is extraordinary important to companies, the interaction between customers and firms is extremely important, especially for the future corporate. In his book “future shock”, Alvin Toffer explained the upcoming “experiential industry”, in which customers would not only satisfy with the basic functions products and services offer, they would be willing to allocate high percentages of their salaries to live amazing experiences (Toffler, 1994). In this kind of “experience economy”, companies will never again simply produce goods, but become an experience platform, co-create value with the customers. Dell and Starbucks are both good examples.
Corporate could be regarded as an aggregation of various resources, validly managing these resources could create profit and value. Firms used to believe that tangible resources such as the land, equipment, and materials are the most important assets, because without these resources, companies are unable to organize manufacture. However, in the current service-dominant times, the key resources have changed to be intangible resources like knowledge, experience, technology and innovation etc (Vargo and Lusch, 2004). It can be said that they are base of corporate competence and core capability. This is not to say that those tangible resources are not important any more, but that their importance has comparably diminished, which is because that the buyers’ market is the dominant in the current economic environment, customers have unprecedented wide range of choices and their needs are escalating, only the high knowledge and technology based products will be favoured by customers. On the other hand, simple physical product without high knowledge and technology is losing competence, which prompts companies to transfer to the knowledge and technology intensive ones. Constantin and Lusch (1994) defined the physical and natural resources to be the operand resources, while the knowledge, technology and innovation kind of resources are be defined as the operant resources (Constantin and Lusch, 1994). This transaction of the focus of resource reveals one fact which is that current corporate competition is no longer the simple competition based on the product, but the full competition based on the knowledge, technology and human resources. If company want to be the winner in such intensively competitive environment, it must set up its own core capability and competitive advantage. Modern corporations more and more emphasize on transferring value from the tangible resources to intangible resources, insisting on creating corporate value through operant resources (Vargo and Lusch, 2004).
S-D Logic emphasizes that knowledge is the fundamental source of competitive advantage, as based on a firm’s ability to make differentiated use of information flow throughout its value creation chain of suppliers, distributors, and customers (Ford and Bowen, 2008). Also, the transaction of focus of resources requires corporate to make an important change on strategies, which is to be the learning organization. Only learning could increase the group knowledge, experience etc intangible assets in the organization, could create core value. Firms not only need to carry out the internal learning, but also turn its attention to the broader external environment and the whole value chain. Not only requires adaptive learning but also innovative learning.
It is indicated by S-D Logic that customer value is created through service experiences and relationships, especially in the co-creation and sharing of resources, including skills and knowledge (Aitken and Ballantyne etc all, 2006). Within the S-D Logic, the customers is a prosumer and co-creator of value, which can lead benefits to both themselves and service providers (Baker, 2003, P461). In the product times, value is almost decided by the producer, value is included in the tangible resources, reflect on the product; however, in the current service times, value is decide by the consumers. Whether or not one product is valuable, how much value it has, that’s not producers’ call, after consumers’ judgement, its value is embodied in the consumers’ recognition and acceptance. So this is like that a drop of water is much more valuable than a diamond in the dessert, which is determined by peoples’ needs. The definition of Customer Perceived Value (CPV) given by Kotler (2003) is the difference between the prospective customer’s evaluation of all benefits and all the costs of an offering and the perceived alternatives (Kotler, 2003, P60). So it can be seen that value relies on customers’ perception and judgement to a large extent. Customers will make their most important judgments of value received through direct service interactions with firms and on service-ability of goods-in-use (Ballantyne and Aitken, 2007). It can also be said that the time-logic of marketing exchange is open-ended, from pre-sale service interaction to post-sale value-in-use (Ballantyne and Varey, 2006).
Baker (2003) said that: “all marketing is about value proposition.” (Baker, 2003, P452). The service-dominant logic brings marketing innovation to the fore through the sharing of new ideas and knowledge within the firm, and between the firm and key customers and suppliers (Aitken and Ballantyne etc all, 2006). The effect of transition of value determination on strategy is that corporate must implement the innovation process and service progress based on the customers, play close attention to their need, opinions and suggestions, which means that marketing research, product test need to be taken regularly, ensuring customer needs could be satisfied. It is the only way to receive customers’ recognition and acceptance and let the value of product could express. Also, firms need to maintain stable long-term relationship with customers, set up various social, structural and emotional connections to enhance customer loyalty and customer lifetime value (Aitken and Ballantyne etc all, 2006).Lean solution which fits the S-D logic and the customer’s role as co-creator could be applied by companies make hands-on strategies, such as continuing improvements, do it right the first time, and management commitment (baker, 2003, P467). Also, there are some principles should be followed (Baker, 2003, P467; Womack and Jones, 2005b, P61):
In the service times, companies more and more recognize the importance of customers who are the direct origin of profit. Old trading ideas do not emphasize the relationship with customers, ignoring customer needs and satisfaction lead to company’s reducing profit and increasing costs. With the further deepen understanding, more and more emphasize on the core position of customers, companies gradually recognize the importance to keep the relationship with customers. This is also one result of the continual development of marketing theories applied to practices. During the process of development, many new concepts have been put forward, such as the Customer Lifetime Value (CLV), Customer Relationship Management (CRM), and Customer Equity (Kotler, 2003). Managers find out it is possible to reduce costs on one side, and attract more new customers by word-of mouth to receive more profit on the other side through building relationship with customers and maintaining customer loyalty.
Strategically, corporate choose customers more carefully, they find out that it is not effective to be indiscriminate customer choosing. Companies discover that not all of the customers are profitable; some customers will even bring negative gearing to them, which is because the too high cost to get customers and/or too short customer lifetime circle, and this is called the lost-for-good customers type. Sherden proposed to change the “20-80” rule with the following: “20-80-30”, first 20% of customers contribute with 80% to the enterprise profit and half of these profits are used to cover the enterprise losses generated by the last 30% of the unprofitable customers (Sherden, 1994). According to this situation, companies start to consider how to measure customer value, how to identify profitable customers, which lead to the CLV evaluation. What companies could do is to model profit on both an annual basis and on a CLV basis to determine customer value in terms of potential profits and CLV (Christopher, Payne and Ballantyne, 2002, P63). For example, Electro plc collected data analyze its customer acquisition and retention economics at the segment level, by doing so it can clearly identify which segment need to be concentrated on and which one is the waste of investment (Christopher, Payne and Ballantyne, 2002, P53). Through this assessment, companies could find out the most important customers and abandon those unprofitable customers. And adopt different marketing strategies and different resource distribution (such as different pricing policies, quality and level of service) to different categories of customers. Firms very focus on building up stable long-term relationship to achieve the supplier-customer win-win relationship (Baker, 2003, P469). IBM is good at it CRM, it can make the best use of every opportunity contacting with customers to impress them and increase loyalty to company, and finally enhance corporate profit and reduce cost (IBM, 2009). For example, its CRM outsourcing service provide reliable methods, new ideas and innovative thinking to help firms enhance customer-oriented marketing, sales and the effectiveness and efficient of services (IBM, 2009).
When companies are pursuing the long-term development, especially when we hope to build a permanent operating institution, we must have a broad view, not only focus on customers’ current value, but also create and enhance customers’ lifetime value. Firstly, companies need to ensure the quality of its products could satisfy customers’ need; then, companies need to be able to provide good “consumption experience” to attract customer participation and build their loyalty to your brand. Tactics could be that firms not only provide after-sale service, but actively offer lifetime service, cultivate “lifetime customers”, create lifetime value in further (Lusch, Vargo, and Malter 2006).
CRM regards that the total value of the firm’s customer base is an important driver of company profitability (Kotler, 2003, P52). In order to set up a comprehensive customer database, high-quality, timely, and accurate information need to be collected such as customer’s demographics, past purchase etc and then put into a data warehouse. And the database could be used by companies on marketing like to identify customer response, make attractive or timely offers ect. However, Kotler (2003) also identified three problems of database marketing: firstly, companies need to spend a large investment in computer hardware, database, software, analytical programs, communication links, and skilled personnel to build and maintain a customer database; secondly, it is difficult to get everyone in the company to be customer-oriented in and to use the available information; thirdly, customer may not want to keep a relationship with the company, some of whom may even think that their personal information should not be collected (Kotler, 2003, P55). And some real examples tell us that the database marketing is not helpful to every company’s CRM, reasons of failure of CRM implementation could be the high cost, poorly designed system, ignorance by collaborators (Kotler, 2003, P56).
Conclusively, we are facing a totally different consumption and marketing environment, so we should also change our ideological foundation of making strategies. Major changes include that marketing has shifted from the goods-dominant logic to service–dominant logic; customers could actively choose their favourite products; the key resources have changed to be intangible resources; customers become a co-creator of value; maintaining customer relationship becomes more and more important to companies. So strategic and tactical implications to companies are: be customer-oriented, continually satisfy customer needs; enhance the service consciousness and improve service quality; increase customer participation; marketing research, product test need to be taken regularly to ensure customer needs could be satisfied; carry out adaptive learning and innovative learning within the company. Two main types of benefits could be brought to companies: reduce costs and increase profit and value through CRM. However, the initial investment is expensive, and it is hard to make ensure everyone one in the company could be customer-oriented, also, some customers may refuse to maintain relationship with firms.
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