Abstract
An area that receives limited attention in service-dominant (SD) logic is exchange governance. Exchange governance provisions can determine how benefits and costs are created and distributed, hence their importance. Much of the rationale for this oversight arises due to the emphasis on “value” in SD logic. With this as a starting point, this commentary article offers three sets of suggestions to integrate exchange governance into SD logic research. First, the subjective, socially embedded nature of value necessitates a greater reliance on norms-based governance. Under SD logic, there is a need to govern for a wider variety of idiosyncratic interactions throughout a service ecosystem. This has a bearing on monitoring and control activities. Second, SD logic is virtually silent on resource ownership. Understanding the property rights associated with value-creating resources is likely to determine who creates and appropriates value. Third, value-in-use suggests that value does not occur at the point of exchange exclusively. Given this, there is a need to consider value at the point of exchange as well as during the course of usage. The commentary concludes with a brief research agenda.
Keywords
Introduction
Service-dominant (SD) logic research currently has two foci. First, a significant debate has emerged into the role of SD-Logic as a new general theory of marketing (Ballantyne and Varey, 2008; Lusch and Vargo, 2014; Rust, 2006; Vargo, 2009; Vargo and Lusch, 2008a). The basis and means of buyer–supplier exchange are of central importance in this literature. A second strand of SD logic research centers on the application of SD logic to address specific issues. These include innovation, addressing service failure, and supply chain management (Gelbrich et al., 2014; Glenn Richey et al., 2010; Lusch, 2011; Michel et al., 2008). While SD logic continues to grow in diversity and value, considerable scope still exists for theoretical development. One such area in need of attention is exchange governance, that is, the management of exchange party responsibilities and interactions during an exchange.
Buyer–supplier exchange involves a series of implied and explicit rules that affect the behavior of both parties to exchange. Inspired by transaction cost economics (TCE) (Williamson, 1979, 1991, 1993), research in this area suggests that these rules emerge either through shared social norms or through agreed legal contracts (Cannon et al., 2000; Heide et al., 2007). The degree to which each party complies with the rules can determine whether the other party perceives valuable outcomes from the exchange. To encourage these valuable outcomes, partner firms engage in governance activities, including monitoring and controlling exchange partner actions (Heide et al., 2007; Rindfleisch and Heide, 1997). Valuable outcomes are more likely in committed relationships, where relational norms have a far more profound governing effect than contract enforcement efforts (Jap, 1999; Kale et al., 2000; Qiong et al., 2010). Exchange governance has become particularly important in business market contexts due to the lengthier and complex exchange processes that are more common in these settings relative to consumer markets (Dyer, 1997; Heide et al., 2007; Paulin and Ferguson, 2010). Therefore, the present commentary focuses on exchange governance in business market contexts.
At present, SD logic is virtually silent on exchange governance. As such, this commentary highlights three areas where further research could help to identify how SD logic could benefit from exchange governance concepts in TCE. The article begins with a brief comparison of SD logic and TCE.
Comparing SD logic and TCE
Substantial proportions of SD logic and TCE research center on buyer–supplier exchange. The interpretation of this phenomenon has a number of similarities under both theories, with both suggesting a multistage process. SD logic holds that value-in-use is the primary way that customers realize positive outcomes (Lusch and Vargo, 2011, 2014; Vargo and Lusch, 2004). Usage requires multiple interactions with resources over time. This has become a central element in the broader SD logic research, with several studies suggesting that buyer–supplier exchange involves a series of stages and that these are most observable in business market contexts (Flint, 2006; Flint et al., 2011; Tuli et al., 2007). TCE also suggests a multistage process. Williamson (1979, 1991, 1993) suggests transaction costs for customers emerge through search, acquisition, usage, and disposal. This interpretation implies a series of resource interactions over time. While similarities exist between SD logic and TCE, considerable differences are also evident (see Table 1).
A comparison of SD logic and TCE.
SD: service-dominant; TCE: transaction cost economics.
SD logic focuses on the interactions between actors (Lusch and Vargo, 2014). Actor-to-actor interactions are the bases for resource integration, normalizing (i.e. ensuring the exchange process aligns with shared meanings), and representing (i.e. communications) practices (Lusch and Vargo, 2014). These are elements of a collaborative approach to value creation (Lusch and Vargo, 2014; Payne et al., 2008). TCE, on the other hand, focuses on the exchange of tangible products and, as such, is one of a clutch of theories that adhere to a “goods-dominant” logic (Vargo and Lusch, 2004). Under SD logic, actor-to-actor interactions resemble a service ecosystem when considered in aggregate (Lusch and Vargo, 2014; Vargo and Lusch, 2015). In this, each member exchanges valuable outcomes with one another through both direct and indirect collaborations. From the TCE perspective, specific interactions occur between buyers and suppliers (Dyer and Chu, 2003; Heide et al., 2007; Wang et al., 2012). However, a branch of TCE research also considers the ways in which customer firms manage supplier networks to minimize transaction costs (Blois, 1990; Claro et al., 2003; Park, 1996).
Exchange governance and SD logic
SD logic suggests the nature of exchange content, the process of exchange, and context of exchange all differ from the goods-dominant TCE. This raises some important issues for exchange governance.
How to govern “customer value”
One of the foundational premises of SD logic is that value is “ … subjectively and phenomenologically determined by the customer … ” (Lusch and Vargo, 2014; Vargo and Lusch, 2008b). Customer-perceived value research suggests this is either goal-driven (i.e. customer value occurs when purchase objectives are met) or the net result of a comparison between perceived purchase costs and benefits (Khalifa, 2004; Sánchez-Fernández and Iniesta-Bonillo, 2007). SD logic highlights this process as occurring within a specific “space” (Crowther et al., 2011) that is subject to prevailing social dynamics. Indeed, the collaborative nature of value creation is a core element of SD logic, with all actors considered “co-creators” of value (Lusch and Vargo, 2014; Payne et al., 2008). This subjective, socially embedded interpretation of exchange outcomes in SD logic contrasts with TCE, where objectively identifiable financial costs are the primary focus of exchange. The narrow focus on costs in TCE has been subject to criticism since it does not capture benefits or other exchange outcomes (Ghoshal and Moran, 1996).
The broader interpretation of exchange in SD logic suggests a need to reconsider the nature of governance approaches. Rather than rely on the monitoring and control of financial costs through formal contracts, there is a greater need to rely on norms-based contracting. This later form of contract was initially envisaged as a way to incorporate adaptability in interfirm contracts (Macneil, 1978, 2000). However, there has been a considerable body of research, which shows that combining norms-based contracts with formal contracts outperforms one contract form in isolation (Cannon et al., 2000). SD logic highlights the role of normalizing processes (where acceptable implied standards of behavior emerge between actors) as means to ensure actors have sufficient understanding of the social context while also supporting appropriate standards of behavior (Lusch and Vargo, 2014).
The recognition of normalizing processes as a means to govern value creation and appropriation by actors suggests a slightly different interpretation of TCE-based notions of norms-based contracting. The primary difference is that SD logic focuses on a service ecosystem as an aggregation of actors with vested interests rather than buyer–supplier exchange exclusively (Lusch and Vargo, 2014; Vargo and Lusch, 2015). Therefore, the idiosyncratic, socially embedded nature of value and the broadness of the value-creating context (service ecosystem) suggest a broader basis for exchange governance that is more reliant on normalizing processes. This is likely to be more appropriate in more cohesive social contexts with existing norms that are well policed through social penalties and incentives than in less cohesive social contexts. With this in mind, the types and methods of monitoring and controlling efforts require reconsideration so as to incorporate (i) the subjective nature of value and (ii) the service ecosystem.
Resource ownership
One of the central claims of TCE is that specific investments in partner firms reduce transaction costs (Dyer and Chu, 2003; Jap, 1999, 2001). However, decisions to do so pose significant risks to both partners, the biggest being partner opportunism (Paulin and Ferguson, 2010; Wathne and Heide, 2000). SD logic, with its emphasis on normalizing processes, does not consider how and when these idiosyncratic investments are appropriate or necessary. Indeed, the ownership of resources more broadly is something that SD logic does not address. While TCE shows that resource ownership allows the owners to experience benefits while tolerating associated costs, the notion of property rights requires further consideration in SD logic. Implied in SD logic is the relative mobility of resources throughout a service ecosystem. This may be true when considering individual actors, but what about other resource types? While SD logic suggests resources “render benefits,” there is little guidance as to how actors appropriate benefits or costs beyond direct actor-to-actor exchanges. SD logic would benefit from further considerations of resource ownership.
Value over time
Both SD logic and TCE consider an exchange process in terms of a sequence of steps (as discussed above). While TCE focuses on the costs attributable to the usage stages of a specific product, SD logic focuses on resource use over time and the value that this generates. As such, SD logic considers outcomes (value) both in terms of immediate outcomes from exchange and as resource use over time, which may be separate from the specific exchange episode. While the value-in-use concept in SD logic does not easily lend itself to governing specific exchanges, this is further complicated when considering the use of resources beyond specific exchanges. Indeed, the properties of the resource may change over time. Previous studies suggest resource use requirements may also change over time (Flint et al., 2002). From an exchange governance perspective, monitoring and control activities become difficult when value is a fungible in manners such as this. For example, how can exchange governance approaches incorporate non-exchange value creation and realization? Further research attention in this area would help marry governance arrangements with value emergence over time.
Toward a research agenda
While the commentary relies on a reasonably narrow body of TCE research, it does highlight the considerable scope for exchange governance studies in SD logic. Based on the above analysis, there appears to be several sorts of research questions in need of attention: Since value is idiosyncratic, how might governance mechanisms account for this? How, and to what extent, do formal versus norms-based contracts perform given the idiosyncratic notion of value and the distributed nature of the service ecosystem? How can value incentivize activities in the service ecosystem? Since value is broader than financial costs alone, does this broaden the basis to encourage actor compliance activities? How and when should actors own resources? Is it necessary to own resources to experience valuable outcomes? Is resource ownership detrimental to valuable outcomes? Given the dual nature of value (i.e. value-in-exchange and value-in-use), how can actors utilize governance mechanisms to account for this? This represents a need to understand both the explicit instance when value creation occurs and the emergent nature of value. Should value be created within the boundaries of the firm, by the market, or by the network (service ecosystem)? How should these decisions be made?
By further consideration of these topic areas, there is considerable scope for SD logic to inform managerial approaches to value management while also highlighting important issues for policymakers and regulators interested in exchange governance.
Footnotes
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.