CONCEPTUAL/THEORETICAL PAPER
Institutions and axioms: an extension and update
of service-dominant logic
Stephen L. Vargo1
& Robert F. Lusch2
Received: 8 April 2015 /Accepted: 10 June 2015 /Published online: 16 July 2015
# Academy of Marketing Science 2015
Abstract Service-dominant logic continues its evolution, facilitated
by an active community of scholars throughout the
world. Along its evolutionary path, there has been increased
recognition of the need for a crisper and more precise delineation
of the foundational premises and specification of the
axioms of S-D logic. It also has become apparent that a limitation
of the current foundational premises/axioms is the absence
of a clearly articulated specification of the mechanisms
of (often massive-scale) coordination and cooperation involved
in the cocreation of value through markets and, more
broadly, in society. This is especially important because markets
are even more about cooperation than about the competition
that is more frequently discussed. To alleviate this limitation
and facilitate a better understanding of cooperation
(and coordination), an eleventh foundational premise (fifth
axiom) is introduced, focusing on the role of institutions and
institutional arrangements in systems of value cocreation: service
ecosystems. Literature on institutions across multiple social
disciplines, including marketing, is briefly reviewed and
offered as further support for this fifth axiom.
Keywords S-D logic . Theory . Institutions .
Service-dominant logic . Ecosystems
Introduction
It has been a little more than a decade since our initial collaboration
offered a perspective on how marketing thought and
practice was evolving to a new dominant logic (Vargo and
Lusch 2004)—now widely known as Bservice-dominant (SD)
logic^—and over half that time since we further documented
the evolution of the core framework (Vargo and Lusch
2008). During that period, through the participation of countless
contributing scholars from around the world and from an
ever-growing array of disciplines, S-D logic has been, and
continues to be, further consolidated, extended, and elaborated.
An example of this consolidation is the reduction of the ten
foundational premises (FPs) (Vargo and Lusch 2004, 2008) to
four axioms (Lusch and Vargo 2014), from which the remaining
six FPs could be derived, providing a more parsimonious
framework. Elaborations have been extensive and have
ranged from the modification of Bvalue-in-use^ to Bvalue-incontext^
(Chandler and Vargo 2011) and its amplification, in
turn, to include Bvalue-in-social-context^ (Edvardsson et al.
2011), to the exploration and further explication of the
cocreation of value (e.g., Payne et al.2008), value propositions
(Chandler and Lusch 2015), and brands (e.g., Merz et al.
2009; Payne et al. 2009), to exploring the implications of a
broader ecosystems perspective (Vargo and Lusch 2011), to
the use of S-D logic as a foundation for service science (e.g.,
Spohrer and Maglio 2008), and its application in logistics
(e.g., Randall et al. 2010), information technology (e.g., Yan
et al. 2010), and hospitality management (e.g., Shaw et al.
2011), among endless other elaborations, applications, and
amplifications.
Most important among the extensions has been a general
zooming out to allow a more holistic, dynamic, and realistic
perspective of value creation, through exchange, among a
wider, more comprehensive (than firm and customer)
* Stephen L. Vargo
svargo@hawaii.edu
Robert F. Lusch
rlusch@email.arizona.edu
1
Shidler College of Business, University of Hawai’i at Mānoa, 2404
Maile Way, Honolulu, HI 96822, USA
2
Eller College of Management, University of Arizona, 1130 East
Helen Street, Tucson, AZ 85721, USA
J. of the Acad. Mark. Sci. (2016) 44:5–23
DOI 10.1007/s11747-015-0456-3
configuration of actors. This perspective reveals additional
structural details that are not apparent from a more dyadic,
micro-level view, but which, at the same time, make the
micro-level phenomena more understandable (Chandler and
Vargo 2011). Arguably, the most important feature of this
structure consists of institutions—rules, norms, meanings,
symbols, practices, and similar aides to collaboration—and,
more generally, institutional arrangements—interdependent
assemblages of institutions. With some exception (e.g.,
Alderson 1965; 57; Araujo and Spring 2006; Arndt 1981;
Carson et al. 1999; Duddy and Revzan 1953; Giesler 2008;
Heide and John 1992; Humphreys 2010; Hunt 1983), institutions
and institutional arrangements have received relatively
little attention in the marketing literature, even though they are
prevalent in the related economic, organizational, and sociological
literatures. The S-D logic literature (e.g., Akaka
et al.2013; Lusch and Vargo 2014; Vargo and Lusch 2011;
Vargo et al. 2015; Venkatesh et al. 2006) is increasingly recognizing
these institutions and institutional arrangements as
the foundational facilitators of value cocreation in markets and
elsewhere. In short, they can more fully inform an understanding
of networks by conceptualizing them as resource-integrating,
service-exchanging actors that constrain and coordinate
themselves through institutions and institutional arrangements.
That is, economic (and other social) networks tend to
be self-governed, self-adjusting service ecosystems engaged
in value cocreation at various levels of aggregation. This institutional
and dyad-to-network-to-systems turn has additional
implications for further development of the foundations of SD
logic, including further refinement in the language used in
the existing FPs/axioms of S-D logic and the addition of a fifth
axiom (eleventh FP).
The purposes of this article are to (1) further update the
existing FPs of S-D logic, highlight their consolidation into a
smaller set of axioms, and adjust the language, as needed, for
consistency, (2) highlight the concept of service ecosystems to
identify the role of institutions, (3) briefly review institutional
theory in marketing and other social science literatures, (4)
explore the role of institutions (and by implication, service ecosystems)
in the S-D logic framework, offering a fifth axiom that
recognizes the role of institutions in value cocreation, and (5)
point toward future directions for S-D logic theory development
and research. The article proceeds in line with these objectives.
The development of service-dominant logic
The 2004 article in the Journal of Marketing (Vargo and Lusch
2004) primarily did three related things: (1) identify an apparent
trend in mainstream marketing thought, away from a principal
focus on outputs (e.g., products) to processes (e.g., service provision,
value creation); (2) identify commensurate commonalities
in a number of diverse research streams and sub-disciplines
(e.g., relationship marketing, service marketing, business-tobusiness
marketing); and (3) identify and advance a convergence
of these events on a shift from emphasizing production
to emphasizing value (co)creation. Given the article’s positioning
for the Journal of Marketing, and in keeping with mainstream
marketing, its focus was relatively micro-level (i.e.,
firm-customer) and managerial, as evident in the language
(e.g., Bco-production,^ Bcompetition,^ Bcustomer oriented^) of
several of the original FPs. Considering its original purpose and
positioning, this was probably appropriate.
However, the process of zooming out to a broader perspective
on value cocreation began almost immediately, as evidenced
in the distinction between Bco-production^ and the
Bcocreation of value^ and the move from a dyadic orientation
toward a network orientation (e.g., Lusch and Vargo 2006;
Vargo 2008). More generally, the broadening can be seen in
our suggestions that S-D logic might serve as a foundation for
a Btheory of the market^ (Vargo 2007), as well as a somewhat
more limited, related general theory of marketing (Lusch and
Vargo 2006) and a more-encompassing theory of economics
and society (Vargo and Lusch 2008). At the same time, often
through the initiation of other interested scholars, we were
connecting S-D logic to other research streams, such as consumer
culture theory (CCT) (Arnould 2006), service science
(e.g., Spohrer et al. 2007), and other disciplines (e.g., information
technology and hospitality management) and subdisciplines
(e.g., international marketing, logistics, service operations),
even as the managerial implications were being further
explored by us and others (e.g., Benttencourt, Lusch and
Vargo 2014; Brodie et al. 2006; Lusch et al. 2007).
Much of this zooming-out movement, as well as the refinement
of the lexicon of S-D logic, especially as related to the
FPs, was initially more formally captured in an article (Vargo
and Lusch 2008) in this journal, BService-Dominant Logic:
Continuing the Evolution,^ which reiterated previous changes
in language, such as those associated with the Bcocreation of
value^ and the distinction between Bservice^ (a process) and
Bservices^ (units of output). It specified service as the Bbasis,^
rather than the Bunit^ of exchange. It also formally changed
FP9 from its original (Vargo and Lusch 2006) firm-centric
wording, dealing with the integration of micro-specializations,
to a more generic Ball economic and social actors are resource
integrators.^ FP10, BValue is always uniquely and phenomenologically
determined by the beneficiary,^ was also added.
The modified FP9 implies a network structure for value creation
and the new FP10 implies its contextual nature; both
require a move from a single-minded concern with restricted,
pre-designated roles of Bproducers^/ Bconsumers,^ Bfirms^/
Bcustomers,^ etc. to more generic actors—that is, to an actor-to-actor
(A2A) orientation.
While this Bactor^ language was used in several of the FPs in
Vargo and Lusch (2008), and even more broadly in discussing
the parties involved in resource integration, service exchange,
6 J. of the Acad. Mark. Sci. (2016) 44:5–23
and value cocreation in conference presentations (see
sdlogic.net), it was not until Vargo and Lusch (2011) that we
formally completed the turn from parties with pre-designated
roles to generic actors. This was a subtle distinction with wideranging
implications because it signaled that all actors fundamentally
do the same things: integrate resources and engage in
service exchange, all in the process of cocreating value. In that
publication, we identified the exemplar of the A2A orientation as
business-to-business (B2B), rather than the traditional businessto-consumer
(B2C) orientation of mainstream marketing. This is
because, as in B2B, there are no strictly producers or consumers
but, rather, all actors are enterprises (of varying sizes, from individuals
to large firms), engaged in the process of benefiting their
own existence through benefiting the existence of other enterprises—that
is, through service-for-service exchange—either directly
or indirectly, through the provision of some output (e.g., a
good).
This Bgeneric actor^ designation should not be confused
with a position that all actors are identical. Indeed, it is intended
to do just the opposite: disassociate them from predesignated
roles (e.g., Bproducers^ and Bconsumers^) and set the stage for
characterizing them in terms of distinctly constituted identities
associated with unique intersections of the institutional arrangements,
with which they associate themselves.
The A2A orientation also implies several other things. First,
it confirms that value creation takes place in networks, since it
implies that the resources used in service provision typically, at
least in part, come from other actors, as specified in FP9.
Second, it implies a dynamic component to these networks,
since each integration or application of resources (i.e., service)
changes the nature of the network in some way. This in turn
suggests that a network understanding alone is inadequate and
that a more dynamic systems orientation is necessary. Third,
though perhaps less obviously, along with the dynamic systems
orientation, it suggests the existence of mechanisms to
facilitate all of this resource integration and service exchange
through the coordination of actors. Thus, as we indicate in
Vargo and Lusch (2011), acknowledgement and understanding
of the existence and role of institutions, those routinized, coordinating
mechanisms of various types, and institutional
arrangements, assemblages of interdependent institutions, become
essential to understanding value cocreation.
In line with the above, it has been becoming clearer over the
last several years that the narrative of value cocreation is developing
into one of resource-integrating, reciprocal-serviceproviding
actors cocreating value through holistic, meaningladen
experiences in nested and overlapping service ecosystems,
governed and evaluated through their institutional arrangements.
The major components of this narrative are presented in Fig. 1.
To be consistent with this emerging narrative, it is clear that
some of the language of the existing FPs requires modification. It
is also apparent that some of the FPs are more foundational than
others. These issues are addressed in the following two sections.
Modification of foundational premises
As noted, for several reasons, including the positioning of
the article for JM, the original (Vargo and Lusch 2004)
language of S-D logic was, at least in part, expressed in
firm, customer, and managerial terms and, in some instances,
the language needed more precision. These issues
were partially addressed in the modifications and additions
of Vargo and Lusch (2008). With the adoption of
an A2A perspective, the need to further modify the language
of at least four—three of them axioms—of the FPs
becomes more glaringly apparent. These modifications are
discussed below and summarized in Table 1.
FP4: Operant resources are the fundamental source of competitive
advantage
In both Vargo and Lusch (2004) and (2008) we used the
term Bcompetitive advantage^ to capture the beneficial impact
of operant resources (changed from Bknowledge,^ as used in
2004). More recently, we realized that this term not only is
myopic but also misdirects attention because it does not point
directly toward service provision for some beneficial actor as
the primary function. Thus, in Lusch and Vargo (2014) and
elsewhere, we have begun using the term Bstrategic advantage,^
but even the term Badvantage^ has competitive
overtones and we think Bstrategic benefit^ (for the
service-providing actor) more directly conveys the correct
strategic intent. Incidentally, Bstrategic benefit^
highlights an important implication of the service-forservice
conceptualization of S-D logic, namely, that the
service provider also has the role of Bbeneficiary,^ given
reciprocal service exchange.
This shift is not intended to suggest that competition is
irrelevant; we believe that awareness of a beneficiary’s alternative
sources of service is very important to service
Fig. 1 The narrative and process of S-D logic
J. of the Acad. Mark. Sci. (2016) 44:5–23 7
provision. However, the realization that there is competition in
the process of one actor benefiting itself through service provision
to other actors, while critical, is not primary. It also
points the service provider in the wrong direction, toward
the competitor and thus away from the potential service beneficiary.
Competition is (should be) a secondary motivator;
value cocreation through service provision is primary. Thus,
more appropriate wording for FP4 is: Operant resources are
the fundamental source of strategic benefit.
FP6: The customer is always a cocreator of value
Perhaps there is no other FP that has created as much misunderstanding
and, in a few cases, controversy as FP6. The
first misunderstanding is that we are conceptually equating
Bvalue cocreation^ with active participation in the firm’s design,
definition, creation, etc. of its offering (e.g., value proposition).
As Vargo (2008) acknowledges, we are probably
directly responsible for much of this confusion because of
our use of the term Bco-production^ in the original FP6
(Vargo and Lusch 2004). However, we corrected that designation
in Lusch and Vargo (2006) and again, more pointedly,
in Vargo and Lusch (2008). There, and elsewhere, we distinguished
between Bco-production,^ referring to the creation of
the value proposition—essentially, design, definition, production,
etc.—and Bvalue cocreation^—the actions of multiple
actors, often unaware of each other, that contribute to each
other’s wellbeing. We reemphasize this distinction here because
some of the controversy over this FP is based on this
continuing misunderstanding, though there are also other
issues.
Ironically, these issues come from relatively opposing positions—one
normative and the other positive. On the normative
side are scholars who understand FP6 as expressing a
viewpoint that firms should always involve customers (and
in some cases other actors) in the design, definition, creation,
completion (e.g., self-service), etc. of firm output (i.e., coproduction).
However, we have repeatedly emphasized (e.g.,
Vargo 2008; Vargo and Lusch 2008) that we see coproduction
as being relatively optional, subject to a whole
host of factors (e.g., knowledge and desire of the beneficiary
and existing knowledge of customer preferences on the part of
the provider, among many others), whereas cocreation of
value is simply a positive statement that, at least in human
Table 1 Foundational premise development
Foundational
Premise
2004 2008 Update
FP1 The application of specialized skills and
knowledge is the fundamental unit of
exchange.
Service is the fundamental basis of
exchange
No Change
AXIOM STATUS
FP2 Indirect exchange masks the fundamental
unit of exchange.
Indirect exchange masks the
fundamental basis of exchange.
No Change
FP3 Goods are distribution mechanisms for
service provision.
No Change No Change
FP4 Knowledge is the fundamental source of
competitive advantage.
Operant resources are the
fundamental source of
competitive advantage.
Operant resources are the fundamental
source of strategic benefit.
FP5 All economies are service economies. No Change No Change
FP6 The customer is always the co-producer. The customer is always a
co-creator of value.
Value is cocreated by multiple actors,
always including the beneficiary.
AXIOM STATUS
FP7 The enterprise can only make value
propositions.
The enterprise cannot deliver
value, but only offer value
propositions.
Actors cannot deliver value but can
participate in the creation and offering
of value propositions.
FP8 Service-centered view is customer
oriented and relational.
A service-centered view is inherently
customer oriented and relational.
A service-centered view is inherently
beneficiary oriented and relational.
FP9 All social and economic actors are
resource integrators.
No change
AXIOM STATUS
FP10 Value is always uniquely and
phenomenologically determined
by the beneficiary.
No change
AXIOM STATUS
FP11 New
Value cocreation is coordinated through
actor-generated institutions and
institutional arrangements.
AXIOM STATUS
8 J. of the Acad. Mark. Sci. (2016) 44:5–23
systems, which are characterized by specialization and thus
interdependency, value is always cocreated. Hence,
cocreation of value, unlike co-production, is not optional.
The (mis)understanding of either co-production or cocreation
of value as a normative concept is exacerbated by their, often
explicitly, being treated as such (e.g., Ramaswamy and Oczan
2014), especially in the popular, practitioner literature.
As a positive concept, value cocreation has been criticized
by some scholars (e.g., Gronroos and Voima 2013) on the
grounds that we misstate its extent—that is, they argue that
value is only cocreated in select instances, those in which there
is direct, personal interaction between the provider and the
beneficiary and, otherwise, value creation is only Bfacilitated^
by a firm but created solely by the customer. We find the
conceptual difference between Bco^ and Bfacilitate^ essentially
incomprehensible and are thus unaware of any useful, actionable
way that it informs academics or practitioners (or
others). However, we must agree that we did indeed misstate
the extent of value cocreation in Vargo and Lusch (2006,
2008), just not in the direction indicated by Gronroos and
Voima. On the contrary, we drastically understated the extent
of value cocreation. Value creation does not just take place
through the activities of a single actor (customer or otherwise)
or between a firm and its customers but among a whole host of
actors. That is, at least in specialized, human systems (and
arguably in all species), value is not completely individually,
or even dyadically, created but, rather it is created through the
integration of resources, provided by many sources, including
a full range of market-facing, private and public actors. In
short, cocreation of value is the purpose of exchange and, thus,
foundational to markets and marketing.
The essential intent of the original FP6 was to recognize
that the beneficiary is always a party to its own value creation
but in doing so, it inadvertently might have conveyed that
value cocreation is dyadic. On the contrary, as stated, zooming
out reveals that it is neither singular nor dyadic but rather a
multi-actor phenomenon, often on a massive scale, albeit with
the referent beneficiary at the center, as indicated in FP10, and
playing a key, integrative (and evaluative) role in all instances.
This is of course what CCT theorists, network and system
theorists, sociologists, and others have been saying for some
time. For this reason, we believe it is necessary to clarify FP6,
partly by strengthening it, as follows: Value is cocreated by
multiple actors, always including the beneficiary.
Because this point is so central to any meaningful conceptualization
of a service-based logic of value creation, we believe
it needs additional clarification and elaboration. There
actually are two similar, opposing positions to the idea that
value is always cocreated. One, which sees the firm as the sole
creator of value, is directly linked to G-D logic and, arguably,
associated with traditional, mainstream marketing management.
As Hakansson et al. (2009, p. 27) note, BIn approaches
coloured by traditional market assumptions, interaction is
treated as a simple mechanism that facilitates exchange^
(italics in original). Perhaps ironically, this perspective is
at least partially acknowledged in many conceptualizations
of the Bcustomer orientation.^ For example, Rindfleisch
and Morman (2003, p. 422) define customer orientation as
Bthe set of behavior and beliefs that places a priority on
customers' interests and continuously creates superior
customer value.^
The other shifts the locus of value creation to the customer,
though acknowledging that value cocreation is possible in
cases of interaction, but argues that this interaction must be
direct and relatively face-to-face. For example, as Gronroos
and Voima (2013, p. 140) state:
[I]nteractions are situations in which the interacting
parties are involved in each other’s practices. The core
of interaction is a physical, virtual, or mental contact,
such that the provider creates opportunities to engage
with its customers’ experiences and practices and thereby
influences their flow and outcomes. Opportunities
for interacting are natural in service encounters but
may be created in goods marketing contexts too, such
as through order taking, logistics, problem diagnosing,
and call centers.
Aside from the fact that it is not entirely clear what a faceto-face
encounter between a firm and a customer means, particularly
in a digital and virtual world, the word interaction
does not imply face-to-face or repeated encounter at all; it
means Bmutual or reciprocal action or influence^ (Merriam
Webster). Gronroos and Voima also specifically cite practice
theory in support of their definition. But practice theory is not
a theory of involvement in others’ practices through direct,
face-to-face (or virtual) interpersonal interaction but a theory
of dialogical processes between structure and human activity.
This structure can be provided through direct interaction, but it
can also be provided through institutions (see, e.g., North
1990; Giddens 1984; Simon 1996), including those conveyed
physically (e.g., through a good), as Orlikowski (2007) discusses
in conjunction with Bsocio-materiality.^
Furthermore, to invoke what appears to be an
Binseparability^ (i.e., face-to-face) condition or, alternatively,
a service-in-conjunction-with-goods condition for interaction
seems to be partially reclaiming the BIHIP^ characteristic distinctions
between goods and services, which thus makes it
difficult to see how it constitutes a Bservice-logic^ at all, but
rather, something that we would term a Bservices logic,^ with
a commensurate boundary condition. Gronroos (2008, p. 310)
seems to confirm this characterization by noting the existence
of separate, alternatively invocable logics:
Adopting a service logic is a strategic decision. If customers
are buying goods and services as value-creating
J. of the Acad. Mark. Sci. (2016) 44:5–23 9
processes or can be persuaded to do so, a strategy based
on a service logic is supportive - on the other hand, if
they only buy them as resources, developing a market
offering based on a goods logic makes more sense.
In the Bservice logic^ that we call Bservice-dominant logic,^
there is no boundary condition, since S-D logic is transcending;
goods logic is integral to and nested in S-D logic, rather than
distinct from it.
In either case, as noted, it is difficult to understand just what
the distinction between Bfacilitate^ and Bco-^ offers; in both
instances, there are multiple actors to value creation, the recognition
of which is the essential purpose of FP6. A true,
service-based logic implies this multi-actor (often massively
so) orientation to value creation; whether that is termed Bco-^
or Bfacilitation^ is insignificant at best and, arguably, incoherent.
If some prefer to argue that Bvalue is always cofacilitated^
rather than Bco-created^ we see it as an inconsequential,
semantic exercise and consider there to be many
important, scholarly issues more worthy of debate.
One final note on the meaning of Bcocreation^ is appropriate
here. Whereas FP6 is primarily intended to deal with the
multi-actor nature of the process of value creation, it also
characterizes the nature of value realization (outcomes), particularly
in voluntary exchange. That is, value is typically
being created (or anticipated) for multiple actors, including
not only those involved in dyadic exchange, but normally
many others (Lusch and Webster 2011). The value is different
for each referent and must be assessed separately, as implied
by FP9.
FP7: The enterprise cannot deliver value, but only offer value
propositions
In keeping with the A2A orientation, the essential modification
for this FP is to alter the reference to the Benterprise^ to
generic Bactor^ in general. That is, consistent with the A2A
orientation, FP7 should say: Actors cannot deliver value but
can participate in the creation and offering of value
propositions. Once again, we emphasize that the purpose of
this FP is to establish the non-deliverable nature of value and it
does not imply that, once value propositions have been embraced
by potentially beneficial actors, nothing else can be
done by the service-providing actor to contribute to value
creation. To the contrary, the acceptance of value propositions
implies a continuing role by the associated actors, whether
afforded through resources provided directly (e.g., interpersonally)
or impersonally (e.g., through a good). This
latter point is of course also captured in FP6. Also consistent
with FP6, the creation of value propositions should
not be construed to imply they be solely created by service
providers. Rather, they are probably more appropriately
considered narratives of value potential that are
cocreated among multiple actors, including the provider
and beneficiary.
FP8: The service-centered view is inherently customer oriented
and relational
As with FP7, the essential modification needed for FP8
is the reflection of the A2A orientation. Thus, FP8 becomes:
A service-centered view is inherently beneficiary
oriented and relational. As discussed in Vargo and Lusch
(2008), the purpose of this FP is to indicate that, since
benefit for another actor is built into the definition of
service, no Bconsumer orientation^ fix is necessary, as it
is with G-D logic. However, as we have been arguing,
both Bconsumer^ and Bcustomer^ imply something of a
firm-centered orientation, since Bconsumer^ is defined in
terms of the consumption of firm output and the customer
is contingent on the identification of a specific firm. On
the other hand, Bbeneficiary^ centers the discussion on the
recipient of service and the referent of value cocreation.
Similarly, since S-D logic assumes value cocreation, it is
inherently relational for this reason alone. Importantly, this is
not the Brepeat transaction^ conceptualization of relationship
associated with G-D logic (see Vargo 2009; Vargo and Lusch
2010) but rather a multidimensional one as discussed in Lusch
and Vargo (2014). In particular, value cocreation is represented
by the reciprocity of exchange, as well as by the existence
of the shared institutions that facilitate this exchange, as will
be discussed.
The service ecosystem perspective
Alderson (1965) was arguably the first to advocate an ecological
framework for the study of marketing systems and specifically
put a major focus on cultural ecology, thus creating a
broader view of marketing. S-D logic has also been broadening
the perspective, even further. Since Vargo and Lusch
(2004), we have increasingly encouraged zooming out to
wider perspective than Bfirm^–Bcustomer^ exchange. This
broadened perspective is implied in FP9 and in the updated
wording of FP6 and is dealt with more explicitly in numerous
other publications (e.g., Chandler and Vargo 2011; Lusch et al.
2010; Vargo 2008; Vargo and Lusch 2008), especially Vargo
and Lusch (2011). This zooming out has resulted in a major
turn toward a systems orientation. We use the term
Becosystems^ to identify these systems because it denotes
actor–environmental interaction and energy flow. More specifically,
we use the term Bservice ecosystem^ to identify the
particular kind of critical flow—mutual service provision. We
(Lusch and Vargo 2014) define a service ecosystem as Ba
relatively self-contained, self-adjusting system of resource-
10 J. of the Acad. Mark. Sci. (2016) 44:5–23
integrating actors connected by shared institutional arrangements
and mutual value creation through service exchange.^1
This Bservice ecosystems^ concept is similar to the
Bservice systems^ concept of service science (e.g., Maglio
et al. 2009), defined as Ba configuration of people, technologies,
and other resources that interact with other service systems
to create mutual value,^ which is also grounded in S-D
logic. However, the Bservice ecosystem^ definition in S-D
logic emphasizes the more general role of institutions, rather
than technology. On the other hand, institutions and technology
can be directly linked, as discussed in Vargo et al. (2015).
That is, technology, in the general sense of its meaning, is
applied, useful knowledge (Moykr 2002) and knowledge is
part of the institutional structure we call society. In short,
technology is an institutional phenomenon.
Likewise, the service ecosystems conceptualization is
somewhat similar to Layton’s (e.g., 2011) conceptualization
of a Bmarketing system.^ However, he sees both knowledge
and institutions as Benvironmental,^ or exogenous, to marketing
systems, though influenced by as well as influencing
them. For Layton, service ecosystems represent restricted,
more focused examples of marketing systems. By contrast,
Alderson (1965) treats institutions as endogenous in his ecological
view of marketing systems. For instance, he identified
the relation between behavior and structure as determined by
Brules which are generated by interaction among the members
of a system^ (Alderson 1965, p. 301) and Brules of conduct,
which grow out of interaction among separate systems^
(Alderson 1965, p. 301), thus strongly supporting the rationale
for a focus on institutions in the study of service ecosystems.
Institutions
In S-D logic, these institutions—humanly devised rules,
norms, and beliefs that enable and constrain action and make
social life predictable and meaningful (Scott 2001; see also
North 1990)—and higher-order, institutional arrangements—
sets of interrelated institutions (sometimes referred to as
Binstitutional logics^)—and the process and role of
institutionalization are the keys to understanding the structure
and functioning of service ecosystems. Indeed, they are, arguably,
the keys to understanding human systems and social
activity, such as value cocreation, in general.
It is important to note that when we, and most institutional
theorists in various disciplines, use the term Binstitutions,^ it
does not mean organizations, as it is sometimes intended in
everyday discourse. As North (1990, pp. 4–5) distinguishes
between the two, institutions are the Brules of the game^;
organizations are the players (the teams). They are functionally
aligned but conceptually distinct (see also Scott 2008;
Thornton et al. 2012). Institutions come in many forms; they
can be formal codified laws, informal social norms, conventions,
such as conceptual and symbolic meanings, or any other
routinized rubric that provides a shortcut to cognition,
communication, and judgment. In practice, they typically exist
as part of more comprehensive, interrelated institutional
arrangements.
The development and use of institutions and institutional
arrangements are important, at least in part, because humans
have, contrary to the assumptions of neoclassical economics,
limited cognitive abilities. Simon (1978) comments that the
concept of rationality is the main export of Beconomics^ to
other social sciences. However, human cognitive ability is a
limited resource, and Simon cautions against understanding
rationality in the Bnarrower^ maximization-sense of the term
and argues for a Bbroader,^ institution-assisted conceptualization.
That is, the central issue is not so much whether or not
actors are rational but rather how they efficiently rationalize,
given limited abilities. The answer is through institutions that
are diffused and shared. These institutions represent more
efficient and arguably more effective ways to reduce
thinking. As mathematician and philosopher Alfred North
Whitehead (1911, p. 61) commented: BIt is a profoundly erroneous
truism, repeated by all copy-books and by eminent people
when they are making speeches, that we should cultivate
the habit of thinking of what we are doing. The precise opposite
is the case. Civilization advances by extending the number
of important operations which we can perform without thinking
about them.^ Institutions allow this limited-cognition
rationality.
Institutions enable actors to accomplish an ever-increasing
level of service exchange and value cocreation under time and
cognitive constraints. This is in large part because institutions,
when shared by actors, result in a network effect with increasing
returns. In fact, the more actors share an institution the
greater the potential coordination benefit to all actors. Thus,
institutions can play a central role in value cocreation and
service exchange.
However, while institutional facilitation provides for more
parsimonious rationality, it comes at a potential expense. That
is, the ability of Bperforming without thinking^ is inherently
susceptible to acting without reevaluating the appropriateness
of the institutions for the context at hand. Thus, institutions
can lead to ineffective dogmas, ideologies, and dominant
logics. Perhaps ironically, as will be discussed, even these
constraints provide opportunity for innovation. For example,
in our initial writing on S-D logic (Vargo and Lusch 2004), we
were essentially noting the institutionalized mindset of marketing,
what we referred to as goods-dominant logic, as well
as suggesting a Bpotentially^ revised dominant logic. For
1
In Lusch and Vargo (2014), we use the term Blogics^ rather than
Barrangements.^ Since the former term tends to be specifically associated
with the organizational institutionalization literature, we have begun
using the latter term.
J. of the Acad. Mark. Sci. (2016) 44:5–23 11
nearly a century, marketing theory and activity had been guided
by a shared, implicit belief in neoclassical economics,
goods orientation, or manufacturing logic. Production was
understood in terms of being best if removed from the customer
and taking place in large, homogeneous units of output
to gain efficiency and then sold to the market by setting the
four P’s to maximize profits. Customers were viewed as exogenous,
operand resources to be targeted to increase their rate
and level of purchasing of firms’ output. As with other institutional
arrangements, this logic was relatively unquestioned
and infrequently challenged as a foundational framework.
However, problems with and disruptions to this framework,
along with partial fixes, had been surfacing for decades, if not
centuries (Vargo and Morgan 2005). S-D logic was an attempt
to distill an evolving, revised institutional arrangement from
these disruptions.
Although he did not regularly use the term, institutions are
what Nobel laureate Herbert Simon (1996) was referring as
the Bartificial,^ which he defined as Bman-made^ (p. 4) in The
Sciences of the Artificial. Perhaps it is testimony to the importance
of institutions that, in the last quarter century, five other
Nobel laureates in economic sciences (Coase, North, Ostrom,
Sen, and Williamson) have been directly associated with institutional
theory and, although perhaps not directly in terms
of theory development but certainly in terms of methodology,
a sixth Nobel laureate, Vernon Smith, in his work in experimental
economics, typically manipulated economic
institutions.
Institutions also form the structure, which represents
both the outcome and context of human action in
Gidden’s (1984) recursive structuration theory. They also
form the structure, in relation to which Ostrom (2005,
pp. 3–4) asks:
Can we dig below the immense diversity of regularized
social interactions in markets, hierarchies, families,
sports, legislatures, elections, and other situations to
identify universal building blocks used in crafting all
such structured situations…to build useful theories of
human behavior in the diverse range of situations in
which humans interact? Can we use the same components
to build an explanation for behavior in a commodity
market as we would use to explain behavior in a
university, a religious order, a transportation system, or
an urban economy?
Her answer to these questions was Byes.^ Similarly,
though not specifically referring to institutions, von
Mises, (1949, p. 2) argued, BOne must study the laws of
human action and social cooperation as the physicist
studies the laws of nature^ and pointed to the Binescapable
interdependence of social phenomena^ as foundational to his
view.
Foundational overview of institutional thought
Institutional theory has found a strong foothold in economics,
sociology, organizational science, and political science. These
disciplines share something of a common, core understanding
of institutions—not surprising given the often common historical
perspectives and high degrees of cross fertilization—but
each of which has a somewhat nuanced approach and often
use a combination of somewhat different and shared lexicons.
Though not intended to provide a comprehensive review and
recognizing that differences within-discipline orientations are
almost as prevalent as those between disciplines, the following
sections briefly review these disciplinary literatures, especially
as they relate to developing an S-D logic, service ecosystems
perspective.
Institutional perspectives in the sociology literature
The study of institutions has a long tradition in sociology,
dating back to its inception. Exploring the genealogy of this
tradition, Scott (2001) highlights such influential scholars as
Spencer, Durkheim, Marx, and Weber as the forerunners of
institutional theory. Foundational to their early work was the
tension that lies between materialist, agency-driven views and
those focused on Bideational, normative forces that serve as
constraints on individuals’ behavior (Hinings et al. 2008, p.
476)^—in short, the role of agency versus structure. Spencer
(e.g., 1910), for example, described social systems as a series
of institutional subsystems and highlighted their centrality in
society, but saw them as evolving naturally from the selfinterest
of actors—e.g., conscious choice. Durkheim (1912/
2008) was also interested in the forces that held society together
but, at least in his later work, in contrast to Spencer,
focused less on conscious choice and put more emphasis on
the normative structures that characterize social life.
Whereas both Spencer and Durkheim, despite some differences,
focused their work on the persistence of social order,
Marx was mainly concerned with the forces that enabled major
transformations in social structures (Hinings et al. 2008),
especially those relating to the struggles between classes (i.e.,
ownership/capitalist and productive/labor), driven by their differing
orientations. More specifically, he viewed class conflict
as inevitable and primarily driven by related rational efforts,
while acknowledging the more normative roles of cultural
forces and ideologies. Finally, Weber, by highlighting the interplay
of material and ideational forces, argued for a more
balanced approach that describe these forces as Bindependent
though intertwined phenomena^ (Hinings et al. 2008, p. 476).
Of particular importance was his theorizing about legitimacy,
the subjective belief in the authority of a rule or normative
structure, and its macro-social consequences.
Fast forwarding, of particular importance to institutional
theory in sociology, at least as it relates to marketing and S-
12 J. of the Acad. Mark. Sci. (2016) 44:5–23
D logic, is the work grouped under the broad rubric of practice
theory. While more of a generalized approach than an integrated
body of work, it has been particularly instrumental in
linking agency with structure. For example, Bourdieu (1977)
developed the concept of habitus to capture the internalized,
mental schemata that represents external social structures and
guide practices and appropriated the concept of fields from
Lewin (e.g., 1939) to capture particular nested and overlapping
domains (e.g., marketing, scholarly activity) of social
structure. Actors’ practices then are produced from the habitus
developed through the negotiation of the reconciliation
of multiple fields. Giddens (1984) has arguably been the
most influential of the practice theorists in bridging agency
and structure through what he calls structuration, a
transcending conceptualization that asserts that structure is
both the outcome of and context for human action. That is,
the connection between agency and structure is a relational
duality, rather than a dichotomous dualism. Institutions in
this duality are the Bpractices which have the greatest timespace
extension.^ Of equal influence has been Granovetter
(e.g., 1985) who, based in part on Karl Polanyi (e.g., 1968),
advanced the concept of embeddedness—the idea that actors’
relationships take place in social networks and associated
institutions.
Institutional theory with an organizational focus
Closely aligned with the sociological literature, though somewhat
more hybrid and transdisciplinary, is the study of institutions
with an organizational focus, often conducted under
the rubric of institutional logics. Regardless of the label, the
central concern continues to be the interplay and reconciliation
of the more Btaken-for-grantedness^ of normative structures
(i.e., organizations) and the more rational, individualistic
practices of actors, usually characterized as agency. Meyer
and Rowan (1977), for example, based on the Weberian use
of legitimacy, shaped work on organizational institutionalism
by focusing on three concepts: institutional rules, legitimacy,
and isomorphism—the constraining impact of institutional environments
that causes homogeneity in the activities of actors—thus
downplaying the importance of agency and emphasizing
the role of organizational structure.
DiMaggio and Powell (1983) extended Meyer and
Rowan’s work on isomorphism by highlighting the importance
of the structural dynamics in organizational fields—sets
of organizations that constitute a recognizable whole (e.g.,
automobile industry). Isomorphism, in this context, is specifically
conceptualized as Ba constraining process that forces
one unit in a population to resemble other units^ (Hawley
1968) that could not be explained by competitive pressures
or other environmental conditions or efficiency motives (see
also Thornton et al. 2012). However, missing in this work was
an explanation of institutional change and disruption.
In an effort to overcome this weakness, DiMaggio (1988)
introduced the notion of institutional entrepreneurs, which he
defined as actors who initiate changes that contribute to creating
new or transforming existing institutions. Thus, institutional
entrepreneurship aimed not only to explain Bhow institutions
influence actors’ behavior but also how these actors
might, in turn, influence, and possibly change institutions^
(Battilana and D’Aunno 2009, p. 66). In line with this extension,
DiMaggio and Powell (1991) point to the importance of
practice theoretical approaches, such as Gidden’s (1984)
structuration theory or Bourdieu’s (1977) habitus, to develop
a more balanced view of the relationships between actors and
institutions.
More recently, researchers have introduced more systemic
explanations for institutional change. For example, Scott
(2008, p. 50) suggests that Binstitutions provide [both] guidelines
and resources for taking action as well as prohibitions
and constraints on actions^ and identifies three institutional
pillars: rule setting and sanctioning activities (i.e., the regulative
pillar), values and norms (i.e., the normative pillar), and
the constitution and interpretation of frames through which
meanings are interpreted (i.e., the cognitive pillar).
However, Thornton et al. (2012, pp. 38–39) argue that the
three pillars lack parallelism, and that, in line with Friedland
and Alford (1991), they actually represent institutional influence
observed from different Blevels of analysis^—individual,
organization, and society. Building further on Friedland and
Alford, they outline a model of an multidimensional, interinstitutional
system of society consisting of Bnearly
decomposable^ (p. 123) ideal-type, institutional orders—
i.e., family, community, religion, state, market, profession,
corporation—of institutional logics. They define these as Bthe
socially constructed, historical patterns of cultural symbols
and material practices including assumptions, values, and beliefs,
by which individuals and organizations provide meaning
to their daily activity, organize time and space, and reproduce
their lives and experiences^ (p. 2). For Thornton et al., field/
organizational-level logics are both embedded in and contribute
to societal-level (i.e., institutional orders) logics, which
provide the building blocks, but they are also influenced by
micro-level processes. This suggests both an alignment with
the structuralism of Giddens (1984) and the Bcombinatorial
evolution^ precept—the idea that new structures always
evolve from parts of existing ones—of Arthur (2009), both
of which Thornton et al. acknowledge.
Consistent with this more systemic approach, Lawrence
and Suddaby (2006), extend DiMaggio’s (1988) work on institutional
entrepreneurship by pointing out that actors not
only engage in institution building, but also in translations,
interpretations, modifications, and accommodations of institutional
arrangements. In particular, their concept of institutional
work Bis concerned with the practical actions through
which institutions are created, maintained, and disrupted^
J. of the Acad. Mark. Sci. (2016) 44:5–23 13
(Lawrence et al. 2009, p. 1). They offer a more encompassing,
practice-theoretical, relational perspective to address institutional
change and the Bparadox of embedded agency, or the
contradiction between actors’ agency and institutional
determinism^ (Battilana and D'Aunno 2009, p. 32) that is, as
described, deeply embedded in the sociology and organizational
literature on institutions.
Institutional theory in economics
There are two institutional traditions associated with economics.
One, (Bold^) institutional economics, shares some of the
same philosophical underpinnings as institutional theory in
sociology and is usually associated with Veblen (1899/
1934), Commons (1934), and Mitchell (1937) in the early to
mid twentieth century.
The Bold^ institutional economists, while differing somewhat
in their specific approaches, shared a common conviction
about the shortcomings of neoclassical economics and
embraced models of dynamic, changing, and in some cases,
evolutionary rules of conduct, habit, and convention (Scott
2008). Notable scholars such as Schumpter and Galbraith
followed in this tradition but, overall, its influence was
blunted, according to Scott (2008; see also Swendberg
1991). He also notes, somewhat ironically, that it has more
in common with institutional thought in contemporary sociology
than does more contemporary institutional thought in
economics.
The other institutional tradition in economics is usually
discussed under the rubric of Bnew institutional economics^
(NIE). Somewhat contrary to Scott, Arrow (1987, p. 734)
argues that Bthe older institutionalism school failed so miserably
[because] the New Institutional Economics movement
consisted of answering new questions, why economic institutions
emerged the way they did and not otherwise,^ rather
than answering old questions of resource allocation and utilization.
But NIE is also characterized by its reclaiming of some
of the perfect competition and marginal utility assumptions
and the methodological rigor associated with neoclassical
economics.
Much of the work on NIE can be traced to Coase and his
work on transaction costs and property rights. Scott (2008, p.
28), for example, calls Coase (1937) the BGodfather^ of new
institutional economics and points to the importance of his
seminal article (BThe Nature of the Firm^), which addressed
the question why some economic exchanges are carried out
within firms rather than through markets and pricing
mechanisms.
However, as Coase (1972, p. 69) noted himself, his early
work was Bmuch cited and little used,^ until it was brought
back to life by work on the new institutional economics of
North (1990) and Williamson (1981, 1988). Williamson
(1975, 1985, 1991), for example, in line with Coase’s (1937)
earlier work, aimed to explain how organizational forms are
shaped. More specifically, in what has become known as
transaction cost analysis (TCA), he argues for a framework
that explains how varying types of organizational forms, such
as markets, firms, and hybrid organizations, are grounded in
the actions of economic agents’ efforts to minimize transaction
costs (e.g., search, bargaining, enforcement) in managing
their exchange activities. According to Williamson, these
costs are incurred because these activities are embedded in
an institutional environment or a Bset of fundamental political,
social, and legal ground rules that establishes the basis for
production, exchange and distribution^ (Davis and North
1971, p. 6).
Similarly, North (1990) argues for an institutional matrix
that provides both Brules of the game^ and the goals of the
players (i.e., organizations). In this context, North highlights
the importance of customs, traditions, norms, and religion and
also works to overcome the dismissive views of institutions
that were prevalent in neoclassical economic thought, noting
that they are essential to cooperation. It is important to note,
however, that, generally, much of the early work on institutions
in the economic literature was, corresponding to early
work in sociology, mainly focused on the constraining properties
of institutions. North (1990, p. 97), for example, describes
institutions as Bhumanly devised constraints that structure
political, economic and social interactions.^ He distinguishes
between informal constraints, such as sanctions, taboos,
customs, and traditions, and formal rules such as constitutions,
laws, and property rights.
More recently, Williamson (2000, p. 595), citing
Matthews, argued that Bthe economics of institutions had
Bbecome one of the liveliest areas^ of his field. While
confessing that his discipline was Bstill very ignorant about
institutions,^ in an important transition from earlier work,
Williamson explicitly highlighted the significance of studying
human actors’ capabilities of conscious foresight, cognition.
and self-interestedness in an institutional context. In other
words, the economic literature is, in line with sociological
thought, beginning to broaden its conceptualizations of institutions
by not only recognizing their constraining but also
their enabling properties. Likewise, North (1990) notes that
when transactions are costly, institutions matter (i.e., are enabling).
TCA has of course found a particular acceptance by
marketing scholars, especially in relationship marketing and
inter-firm governance.
More generally, the shift away from the idealized conceptions
of individual rationality of classical economic thought has
been influenced by the work of Simon. Simon (1957), in
discussing what he called bounded rationality, argues that individual
actors lack the cognitive ability to achieve a high degree
of rationality given the complexity of the environment in which
they find themselves. More specifically, Simon (1945/1997, p.
111) claims that human actors are guided by value assumptions,
14 J. of the Acad. Mark. Sci. (2016) 44:5–23
cognitive frames, rules, and routines and that Bthe rational individual
is, and must be, an organized and institutionalized
individual (emphasis added). Similarly, as pointed out by
Williamson (2000), Simon’s work, along with Granovetter’s
(1985) concept of Bembeddedness,^ both in the context of society
and social network relationships, has also helped to anchor
deeply the study of institutions in economic thought.
As we conclude this brief discussion of institutional theory
in economics, it is interesting to note that Adam Smith, although
not in his writings on economics per se, recognized the
role of institutions in enabling humans to understand the world
around them, a world that they could not understand based on
their limited individual cognitive abilities and computational
skills. Smith (1980) elaborated on the role of scientific theories,
as illustrated in his BHistory of Astronomy,^ where he
argued that scientific theories serve the purpose of achieving
mental tranquility by allowing humans to see the world as
conforming to patterns that become familiar.2
Essentially
Smith was arguing that scientific theories are the Bproduct of
the human need for institutions that would make comforting
knowledge possible^ (Loasby 2001, p. 9).
Institutions in political science
Like economics, institutional theory in political science has an
Bold^ and a Bnew^ version. Old institutionalism in political
science is generally structuralist—focused at macro-level, formal
structures, with an underlying assumption that structure
drives individual behavior. Additionally, it is normatively concerned
with the identification of good, if not best, political
structures (Peters 2012). As Bill and Hargrave (1981; see
also Scott 2008) point out, it also is historical, though not
necessarily dynamic, at least in the sense of being concerned
with future changes. It has also been described as atheoretical,
though Peters (2012, p. 6), argues that there was Bprototheory^
lurking in the background. Political science, as a discipline,
emerged from this old institutionalism, as did the new
institutional movement.
New intuitionalism represents the joint influence of two
movements, which, while different, share some commonalities
moving toward more theoretical and methodological rigor,
non-normative approaches, a focus on micro-level utility
maximization, and concern with societal input into the political
structure (Peters 2012). One of those movements is characterized
as behavioralist and transfers attention from political
structure to political behavior. The other is characterized as
rational choice, which applies assumptions of economic science
to political behavior (Scott 2008).
Of potential particular interest to understanding value and
market cocreation is the work by Ostrom (e.g., 1990, 2005) on
the governance of the commons. She studied the role of diverse
institutions, other than property rights, in the collaborative
management of (natural) ecosystems. At the heart of her
analyses is the Institutional Analysis and Development (IAD)
framework, which she saw as applicable to levels of analysis
ranging from fine-grained (e.g., individual) to coarse-grained
(e.g., nation), in which the whole system at one level is part of
a system of another level. Following Koestler (1973), she
called these systems holons. While the levels might have different
concepts associated with them, she cautions that levels
cannot be treated independent of the whole, but rather both
local and global perspectives are needed for analysis (c.f.,
Chandler and Vargo 2011; Latour 2005). To deal with the
various levels of complexity implied by her framework,
Ostrom used both game-theoretic and qualitative (case study)
methods.
Institutional thought in marketing3
Generally, at least thus far, with a few notable exceptions,
institutional theory has not been as prominent in academic
marketing as it has in the disciplines discussed above, although
interest has been increasing in recent years (e.g.,
Giesler 2008; Humphreys 2010; Hunt 2012; Vargo and
Lusch 2011; MacAlexander et al. 2014). Perhaps this lack of
prominence is ironic, given that the market is often referred to
in institutional terms (e.g., Loasby 2000; Menard 1996), at
least in other disciplines. Perhaps it is also ironic, since one
of its early schools of thought was called the Binstitutional
school^ (Shaw et al. 2010), which described the roles and
dynamics of the various marketing specializations, though it
morphed into a term more synonymous with channels of
distribution.
This is not to say that a concern for institutions and institutional
theory in marketing is totally absent; it is not. It is just
that much of the focus has tended to be conceptually restricted
and disguised in more specific concerns (e.g., relational
norms, attitudes, transaction cost analysis), with the few calls
for a more general understanding of the role of institutions,
while present (e.g., Alderson 1957; Arndt 1981; Duddy and
Revzan 1953; Hunt 1983), generally unheeded.
On the other hand, there has been a long history of what
might be called brief flirtations with institutional thought in
academic marketing, though with varying meanings of the
term. As noted, the Binstitutional school^ is generally considered
one of the first schools of thought. Although it became
2
It is interesting that this manuscript predates Smith’s work on the wealth
of nations and his ideas on economics. Also of the many unpublished
manuscripts in his files upon his death all were to be destroyed except the
BHistory of Astronomy,^ subsequently published in 1980 by Oxford
University Press in a collection of articles.
3
Although laws and public policy are institutions, we do not review the
literature in this area since what is written is not about institutional
thought per se but more about the evaluation of the functioning of laws
and public policy.
J. of the Acad. Mark. Sci. (2016) 44:5–23 15
identified with the organizations involved in distributions and
the channel of distribution itself, the early roots (e.g., Weld
1916, p. 17) were more concerned with the specialized
functions and the structure of marketing, somewhat more in
line with the connotations of the term institution, as we use it
here. However, this soon changed to a focus on the
organizations that were formed around these functions.
Later, Alderson and Cox (1948, p. 143) more directly emphasized
the importance of institutions, defined in terms of
Bpatterns or arrangements of group behavior,^ to the development
of a Btheory of marketing.^ As they noted:
It should be remembered that marketing men call one of
their traditional approaches to the study of marketing the
institutional approach. [With some exception] the term
has been restricted to apply to classifying, describing,
and analyzing the operations of the two million or so
individual establishments that participate in marketing.
This approach is not institutional in the sociological
sense. It is nevertheless adaptable to a more fundamental
and far-reaching approach that would treat retailers,
wholesalers, and other entities active in marketing as
true institutions in the sociological usage of the term.
In this view, agencies of marketing would become patterns
of human behaviors and communication…
Arguably, no marketing scholars have been more direct and
outspoken about the need for studying institutions than Duddy
and Revzan (1953). For example, Revzan (1968, pp. 99, 101),
drawing on Commons, saw institutions representing
Bcollective human action in control of individual action,^
though with varying degrees of exactness or leniency and
completeness and incompleteness. For Revzan (p. 105), the
institutional approach was an evolutionary, holistic approach
to the study of marketing, which Bviews the marketing system
within the entire economic order as an organic whole functioning
through a great variety of interrelated marketing
structures to achieve the purposes attributed to marketing,^
and he argued that it requires comprehension of the
Bfunctional activity,^ the Bstructural organization,^ the process
of Bstructural change,^ and economic and cultural
Bcoordination and control^ (p. 106). In contrast to the
Bmechanistic^ concept of theoretical economics, Duddy and
Revzan (1953, p. 621) saw the institutional approach to
marketing as more analogous to a biological system, albeit
imperfectly, since Bsocial structures, while in large part
inherited and subject to environmental influence, may be
modified or invented at the will of those who constitute their
membership.^
Subsequently, Arndt (1981, p. 37), drawing on Duddy and
Revzan (1953) and partially echoing Alderson and Cox
(1948), noted that B‘institution’ in marketing has referred
mainly to market actors such as manufacturers, wholesalers,
and retailers^ and suggested that the lack of a true institutional
approach in the marketing literature was caused by the fact
that marketing thought was still being profoundly dominated
by the neoclassical economic paradigm, which in turn, was
dominated by BNewtonian thinking^ (cf. Vargo and Morgan
2005)—emphasizing celestial forces and equilibrium
mechanisms—rather than BDarwinian thinking^—emphasizing
how organisms Bchange the environment to which
they initially adapt^ (Arndt 1981, p. 37). Thus, he argued
that marketing scholars need to cut their Bumbilical
cord^ to neoclassical economics, shifting the focus from
final states to processes of change and a broader definition
of institutions Bas sets of conditions and rules for
transaction and other interactions^ (Arndt 1981, p. 37).
For Arndt, that meant a Bpolitical economic^ approach,
settling on a meaning borrowed in part from Stern and
Reve (1980, p. 53) that views social systems as
Bcomprising interacting sets of major economic and sociopolitical
forces which affect collective behavior and
performance^ (p. 30).
Hunt (1983), while acknowledging that the concept
of Binstitutions^ has dual meanings—(1) the organizations
that take title and facilitate marketing and, (2) in
accordance with Arndt (1981), Bnorms, conditions, and
rules for transactions and other interactions^—identified institutions
as one of the Bthree fundamental explanada of
marketing.^ He similarly commented, consistent with
Layton (2011), on the study of marketing systems as Bthe
study of collections of interacting, marketing institutional entities,
and the norms that guide them.^
One significant research stream dealing with institutions
has been concerned with the idea that inter-firm exchanges
cannot be adequately described solely by legal contracts and
other formal mechanisms for governing exchanges (e.g.,
Cannon et al. 2000; Gundlach and Achrol 1993). Often based
on Macneil’s (1980) thoughts on social contracts, this stream
highlights the importance of relational norms. Of particular
note is the work of Heide and John (1992), who argue that
norms, defined as shared expectations about behavior, play a
significant role in structuring economically efficient relationships
between independent firms. More specifically, they
point to the importance of relational norms, those based on
the expectation of mutuality of interest, in governing exchange
relationships. Similarly, Lusch and Brown (1996)
provide empirical support for the use of normative versus
explicit, hard contracts and show that these normative
contracts influence relational behavior such as flexibility,
information exchange and solidarity. Likewise, Canon et al.
(2000) describe five cooperative norms—flexibility, solidarity,
mutuality, harmonizing of conflict, and restrain in
the use of power—as important in adaptations to dynamic
market conditions and safeguarding the continuity of
exchanges.
16 J. of the Acad. Mark. Sci. (2016) 44:5–23
Much of the additional work in marketing has studied institutions
as contextual variables. Some of this was concerned
with supply- or value-chain processes (e.g., Carson et al.
1999; Grewal and Dharwadkar 2002), sometimes combined
with an international or global focus (e.g., Bello et al. 2004;
Yang et al. 2012). Typically this research has somewhat ignored
the broader systemic and dynamic issues. Similarly,
many marketing scholars have highlighted the impact that
regulatory policies, rules, and technical standards have on exchange
in diverse contexts (e.g., Sheth and Parvatiyar 1995).
More recently, marketing scholars have begun to recognize
the importance of institutions in the formation of markets
and brands. For example, Humphreys’ (2010) work on the
casino gaming industry established the importance of
legitimization in institutional change and market creation,
and Kates (2004) investigated the systemic nature of
institutionalization and legitimatization processes in
branding. Similarly, Giesler (2008) examined how the tension
between countervailing institutional ideals impacts
market evolution. Research has also appeared that begins
to address how sacred institutions are becoming more market
facing. For instance, McAlexander et al. (2014) study
the Bmarketization^ of religion and its impact on individuals
and their consumption practices as they identify less
with the traditional religious institution.
All of the above supports the notion that markets,
viewed through an institutional lens, are not seen as
static or preexisting, but as being Bperformed^ through
the actions and interactions of market actors (Harrison
and Kjellberg 2010; Kjellberg and Helgesson 2007),
mediated by institutions. More directly, Kjellberg and
Helgesson (2006, 2007) describe markets as being continually
formed and re-formed through the activities of
economic actors performing sets of interlinked practices.
This is consistent with viewing the market as Ba set of
culturally constituted institutional arrangements^ and Ba
sociohistorically situated institution^ (Vankatesh et al.
2006), as well as our (e.g., Lusch and Vargo 2014)
description of markets as Binstitutionalized solutions.^
As this brief review revels, while institutional research
has not been as prevalent in marketing as it has in several
other disciplines, it nonetheless has been present, sometimes
quite pointedly and at others more incidental.
However, a deeper look at the marketing literature reveals
it is even more populated with institutional concepts than
might be readily apparent. Relevant research streams
include semiotics, attitude research and decision heuristics,
brand valuation, and, as mentioned briefly, research associated,
with TCA. All of these either deal directly with
institutional phenomena or have significant institutional
components. There are many others. What is missing is a
conceptual framework for organizing, integrating, and advancing
these streams.
Institutions in service-dominant logic
In spite of the traditional assumption of neoclassical economics
that economic participants are highly calculative, rational
actors, evidence points toward very restricted cognitive
abilities and Bbounded rationality^ (Simon 1996). This
implies the need for cognitive shortcuts (i.e., heuristics);
institutions of course provide these. From the perspective
of G-D logic and the limited resource-allocation
concerns of neoclassical economics, the story of institutions
is pretty simple: they allow conservation of cognitive
resources for optimum utilization for the purpose
of utility maximization.
However, from the perspective of S-D logic, institutions
take on an expanded role. As discussed, the emerging narrative
of S-D logic is a dynamic one, concerned with value
cocreation (FP6) and determination (FP10), through resource
integration (FP9) and service-for-service exchange (FP1).
Thus, it is a narrative of cooperation and coordination in ecosystems,
as well as the reconciliation of conflict between
them. Institutions are instrumental in these cooperation and
coordination activities by providing the building blocks
(Ostrom 2005) for increasingly complex and interrelated
resource-integration and service-exchange activities in nested
and overlapping ecosystems organized around shared purposes.
In short, institutions represent the humanly devised
(Simon 1996), integrable resources that are continually assembled
and reassembled to provide the structural properties we
understand as social context (Chandler and Vargo 2011;
Edvardsson et al. 2011) and thus are fundamental to our understanding
of value cocreation processes. Some of the
resulting ecosystems represent markets, what we (Lusch and
Vargo 2014) have called Binstitutionalized solutions,^ which,
especially in today’s specialized world, are often made up of
diverse subsystems, including submarkets, coming together in
ways never imagined by most of the participating actors and
which, as a whole, make up the economy. More generally,
service ecosystems represent the assemblages and
subassemblages of society (cf. Latour 2005)
For analytical purposes, these structural assemblages can
be viewed at various levels of aggregation, which we (e.g.,
Lusch and Vargo 2014) and others have labeled Bmicro,^
Bmeso,^ and Bmacro^ levels. Very loosely, we tend to place
individual and dyadic structures and activities (e.g., what
sometimes is considered B2B or B2C) at the micro level,
midrange structures and activities (e.g., Bindustry,^ brand
community) at the meso level, and broader societal
structures and activities at the macro level, though we see all
levels as social and also as relative, rather than absolute, and
thus these assignments are somewhat arbitrary. We additionlly
caution that activity at one level can only be adequately
understood by also viewing it from other levels or, as
Chandler and Vargo (2011) suggest, using Boscillating foci.^
J. of the Acad. Mark. Sci. (2016) 44:5–23 17
For example, individual buyer behavior does not make
sense independent of meso-level structural influences
such as institutionalized brand meanings and industry
standards. In short, understanding context is essential
for understanding the perception and determination of
value, since value is a contextually contingent concept
(Vargo et al. 2008).
More precisely, however, it is important to reiterate that
these are analytical levels only and do not exist independently
of each other. Rather, they represent perspectives
related to levels of aggregation. We have tended to deal
with this issue by invoking structuration theory (Giddens
1984), which says that structural properties are both the
outcome and context of actions—that is, structure and
agency represent a duality, an interdependency, rather than
a dualism, a separation. Structuration theory does not, by
itself, address all of the issues of the nature of this duality,
but its establishment of relational and recursive nature of
structures is both seminal and essential to a robust conception
of levels of analysis, as used in S-D logic. It also links
the process orientation of S-D logic with practice theory,
with which we will argue it has a natural epistemological
fit. More generally and even more precisely, we acknowledge
that the position of actor-network theorists (e.g.,
Latour 2005) that actor networks (close to what we call
service-ecosystems) are flat—that is, there are no separate
individual actors, interactions, and contexts—is consistent
with the S-D logic framework. However, while this flat,
one-level (macro) view might be theoretically consistent
and robust, it does not provide the analytical power that a
more restricted and possibly less robust levels-of-analysis
model, augmented by structuration theory, can provide, at
least for addressing some kinds of issues. Thus, we cautiously
invoke the latter even as we acknowledge the
former.
Just as actors don’t exist independently of (social) contexts,
institutions don’t exist independently of other institutions.
However, here too, a conceptual distinction is useful
because, as noted, institutions work as building blocks
for the ongoing formation and reformation of increasingly
complex assemblages. Thus, also as noted, we use
Binstitution^ to refer to a relatively isolatable, individual
Brule^ (e.g., norm, meaning, symbol, law, practice) and
Binstitutional arrangements^ to refer to interrelated sets of
institutions that together constitute a relatively coherent
assemblage that facilitates coordination of activity in
value-cocreating service ecosystems.
This consideration of the essential role of institutions in
value creation from a S-D logic, ecosystems perspective suggests
an additional foundational premise and axiom: FP11/A5:
Value cocreation is coordinated through actor-generated institutions
and institutional arrangements. The five axioms of S-D
logic are summarized in Table 2.
Advancing S-D logic and the institutional perspective
From our initial reviews (Vargo and Lusch 2004), to occasional
remarks during conference presentations and dialogue with
the S-D logic community, the question of whether or not S-D
logic has limits or boundary conditions has arisen. We have
always been resolute in our belief that it does not. That is, it is
not just applicable to some class of value propositions (e.g.,
Bservices^ vs. goods) or type of exchange (e.g., market vs.
social). With the addition of the fifth axiom and its focus on
institutions and institutional arrangements, we are even more
convinced that the S-D logic framework is applicable to all
exchange. Stated slightly differently, as we and others have
emphasized, value creation can only be fully understood in
terms of integrated resources applied for another actor’s benefit
(service) within a context (e.g., Akaka et al. 2013,
Chandler and Vargo 2011; Edvardsson, et al. 2011), including
the institutions and institutional arrangements that enable and
constrain value creation. Thus, with this increased understanding
brought about through the fifth axiom, S-D logic becomes
an even more general and transcending theoretical framework.
As noted, there have been a number of attempts to recognize
the role of institutions in marketing in the past (e.g.,
Alderson 1957; Arndt 1981; Duddy and Revzan 1953; Hunt
1983). Arguably, these attempts have been less successful than
their advocates might have envisioned for several reasons,
including the lack of a theoretical framework consistent with
the idea of institutional endogeneity and conducive to full
institutional inclusion, the lack of an epistemological and
methodological framework in marketing for advancing understanding
of the institutional role, and the fragmented and limited
nature of the study of institutions, both inside and outside
of marketing. We believe S-D logic provides a necessary,
compatible, and inclusive theoretical framework for marketing
to benefit from and contribute to institutional thought.
At the heart of this compatibility and inclusion is the concept
of Bvalue cocreation,^ not in the normative sense of suggesting
a service beneficiary should be included in production
processes (e.g., Moeller 2008)—what we call BcoTable
2 The axioms of S-D logic
Axiom Desription
Axiom 1/FP1 Service is the fundamental basis of exchange.
Axiom 2/FP6 Value is cocreated by multiple actors, always including
the beneficiary.
Axiom 3/FP9 All social and economic actors are resource integrators.
Axiom4/FP10 Value is always uniquely and phenomenologically
determined by the beneficiary.
Axiom 5/FP11 Value cocreation is coordinated through
actor-generated institutions and institutional
arrangements.
18 J. of the Acad. Mark. Sci. (2016) 44:5–23
production^ (Vargo 2008)—or in the restricted meaning of
direct, dyadic, one-on-one (i.e., business–customer) interaction
(e.g., Gronroos and Voima 2013), but in the sense that it
accommodates, if not necessitates, recognition of the full
range of the cumulatively coordinated resource-integrating
and service-for-service exchange activities of the multiple actors
always involved in every instance of value creation. In
short, S-D logic not only accommodates institutions; the coordinating
role of institutions and institutional arrangements is
essential for a deeper understanding of the value cocreating
processes with which it is concerned.
This is perhaps especially timely because the topic of value
cocreation is of growing interest to practitioners (Ramaswamy
and Ozcan 2014), but expositions on cocreation are theoretically
fragile. In that regard, the expanded S-D logic framework
allows cocreation to be viewed and understood in a more
complete, realistic, and robust manner. Arguably, this is a
precursor to making better strategic decisions.
Another factor that favors the advancement of a full institutional
perspective in marketing more likely at this time relates
to the development of practice theory in sociology (e.g.,
Bourdieu 1977; Giddens 1984; Reckwitz 2002) and its subsequent
importation into (e.g., Araujo and Spring 2006;
Kjellberg and Helgesson 2006) and application to (e.g.,
Edvardsson et al. 2011; Korkman et al. 2010; Vargo and
Lusch 2011) marketing thought. Practice theory is important
to this advancement because, like S-D logic, it shifts the focus
from production output to activities and processes—for our
purposes, of resource integration, service exchange, and value
creation and determination—and thus reinforces S-D logic’s
shift in the primacy of resources from operand to operant. It
also makes institutions and institutionalization processes integral.
This should be no surprise, given that practices—routinized
activities—are institutions. Furthermore, as Nicolini
(2009, p. 1405) notes, practices Bare by definition social, because
it is only at this level that morality, meaning and
normativity can be sustained.^ Thus, a practice view of markets
highlights how economic and social exchange become
reconciled and stabilized. These activities can then be conceptualized
as relatively durable and repetitive resource integration
and value cocreation practices, or, as we have called them,
Binstitutionalized solutions^ (Lusch and Vargo 2014).
Consistent with practice-theoretic approaches, this conceptualization
implies that, rather than being existing structures that
are entered and characterized by competition, markets are
envisioned and created through institutionalization.
This institutional orientation of practice theory, combined
with the resource-generating and value cocreating framework
of S-D logic, has the potential to move S-D logic from the
status of a theoretical framework toward a true theory of the
market (cf. Vargo 2007), and thus arguably closer to strategic
and tactical application. Given its Bgrand theory^ orientation,
the primary implications of S-D logic are strategic, especially
through innovative insight. That is, it reframes the purposes
and processes of economic exchange and provides a zoomedout
perspective that makes it possible to envision new ways to
integrate and beneficially apply (potential) resources.
For example, an S-D logic framework informed by practice
theory and institutional theory has implications for understanding
the market-formation component of innovation (e.g.,
Abernathy and Clark 1985; Schumpeter 1934) in terms of the
creation and recreation of Bintegrative practices^ (see Vargo
et al. 2015). This understanding reconciles quite easily with
the related understandings of the technological component of
innovation, such as Orlikowski’s (2007), represented by concepts
of sociomateriality and Bduality of technology,^ which
are also based on practice theory, as well as Arthur’s (2009)
idea of technological advancement through the (re)combination
(i.e., integration) of useful knowledge (Mokyr 2002) that he
calls combinatorial evolution. Thus, it provides a transcending
common narrative for the market and technological components
of innovation (see Vargo et al. 2015).
Traditionally, the role of technology in economic growth
has been primarily informed by economic growth theory.
Service-dominant logic addresses technology through the role
of operant resources (primarily knowledge and skills) enhancing
human viability, especially through the creation of new
resources. This occurs through the integration of resources
from a host of actors. Institutions enable the coordination,
collaboration, and cooperation of these actors in the value
creation process and thus are critical to understanding economic
growth. Some of these institutions may include such
things as property rights, a relatively stable economic currency,
and contracting norms. Thus institutions and operant resources
can help to actualize the potentiality of technology, as
well as hinder it. Consequently, Binstitutional work^
(Lawrence, Suddaby, and Leca 2009) becomes a vital part of
innovation. Furthermore, technology, once it is diffused and
accepted (i.e., becomes an institutional solution), becomes
integral to the market component of innovation. As noted, this
suggests that economic growth, technology, and innovation
represent a common institutional narrative.
Zooming out even further, this framework might shed light
on the principles of macroeconomic growth, including the
tendency toward the acceleration of global wellbeing with
increased specialization and exchange, even in situations of
increasing population growth accompanied by decreases in at
least some types of operand resources (e.g., Beinhocker 2006;
Bernstein 2004). Only an institutionally coordinated,
ecosystemic framework seems adequate to the task of
explaining this phenomenon. Fully understanding and explicating
this explanatory framework is desirable because, arguably,
it can guide policy makers toward facilitation of the
institutional structures conducive to its advancement.
Economic growth is contingent on innovation. The enhanced
S-D logic orientation achieved through the inclusion
J. of the Acad. Mark. Sci. (2016) 44:5–23 19
of institutions and institutional arrangements provides managers
and policy makers a practical perspective for viewing
and understanding continuous and discontinuous innovation.
It sheds light on how discontinuous innovation, almost always
leading to creative destruction, is heavily intertwined with deinstitutionalization
and reinstitutionalization. It also shows that
all types of actors are a part of the innovation process but that
different types of actors are often faced with at least somewhat
different institutions and institutional arrangements. Innovation
is not only the result of Bproducers^ and Binventors.^
Economic growth is more broadly a cocreation process. This
suggests that an institutionally informed S-D logic perspective
on economic growth theory and other forms of the growth of
human wellbeing needs more exploration and attention.
More generally, several years ago we began to bridge S-D
logic to managerial practice (Lusch et al. 2007, 2010); we
continue on this journey (Bettencourt et al. 2014; Lusch and
Nambisan 2015; McColl-Kennedy et al. 2012) and others are
doing so as well. Importantly the institutional perspective also
brings S-D logic closer to fulfilling the need for mid-range
theory, as has been urged (Brodie et al. 2011), and managerial
and policy directions. All managerial and policy decisions are
decisions that involve resources, their creation, choice, and
integration. When managers and policy makers develop an
understanding of the shared values, beliefs, and norms (i.e.,
institutions) of the constellation of resource-integrating actors,
it allows decisions and policies to be better informed. Rather
than focusing only on dyadic exchange and a narrow view of
resources, the larger system of actors and resources (including
institutional arrangements) is considered and understood. We
use this perspective (Akaka et al. 2013) to point out to managers
and others that an understanding of the complexity of
context, which is heavily informed by institutions and institutional
arrangements, is a practical way for all markets and
service ecosystems to be viewed. This enables us to inform
managers of international markets that all marketing is reducible
to differences in context. With this increased understanding
managerial decisions and policy making is improved.
Moving forward
An additional condition that might assist in the development
of an institutionally oriented understanding of markets and
marketing relates to the ongoing development of complexity
theory (e.g., Holland 2014; Mitchell 2009) and its application
to the understanding of the economy (e.g., Arthur 2014). Like
S-D logic, especially as informed by an emerging understanding
of ecosystems, institutions, and practice, complexity economics
is the study of the formation and reformation of structure
in the economy as the result of Brecursive loops^ in which
Baggregate patterns form from individual behavior and individual
behavior in turn responds to these aggregate patterns^
(Arthur 2013, p. 2; cf. Giddens 1984). Thus, unlike traditional,
equilibrium approaches, it is a model of Bendogenously generated
nonequilibrium^ in which technology is seen in its role
of a primary disrupter of equilibrium.
Consistent with the service ecosystems orientation of SD
logic, complexity theory, especially as it relates to the
economy (Arthur 2013, p. 14)— Bthe set of arrangements
and activities by which a society fulfills its needs^—emphasizes
self-generation and self-adjustment. Thus, it is
well suited to deal with market and economic formation
and emergence. It also potentially brings new methods to
the table, from agent-based modeling to evolutionary computation
(Beinhocker 2010; Lusch and Tay 2004). There
has been some encouragement in economics and marketing
to use complexity theory and computational science
(Tesfatsion 2002; Rand and Rust 2011; Tay and Lusch
2005). These computational tools, when coupled with an
S-D logic inspired model, can provide a new method for
understanding and informing decisions and policies. This
approach could allow firms and policy makers to grow a
service ecosystem in a Bcultural petri dish^ to allow them
to see how markets emerge and proliferate and sometimes
collapse. In this petri dish, one could also alter institutions
and institutional arrangements to study their local and systemic
effects.
There is still a lot of work to do in reconciling S-D logic,
institutional theory, practice theory, and complexity economics,
but at their core they all deal with the evolutionary process
through which actors form, reform, and are influenced by the
endogenously generated structures that support their joint survival—value
cocreation in S-D logic parlance. Through this
reconciliation, we see S-D logic further advancing our understanding
of markets and marketing.
Conclusion
From our initial effort more than decade ago we have striven
to provide a simplifying, realistic, and transcending view of
markets and marketing and more broadly human exchange
systems. Our current effort continues in that direction, but it
is also the result of listening to multiple and often opposing
views from passionate scholars throughout the world whom
have sensitized us to the power of language and the need for
more clarity and, in many cases, the need for an even more
robust portrayal of markets. As a result we have found it
necessary and timely to offer an updated statement and rationale
of the S-D logic foundational premises. At the same time
it has become evident that the recognition of the central role of
institutions and institutional arrangements and the resultant
heuristics that emerge that foster cooperative and coordinated
behavior among actors in an evolving service ecosystem is
central to a more complete and realistic portrayal of markets
20 J. of the Acad. Mark. Sci. (2016) 44:5–23
and marketing. It is one that might provide the foundation for
a theory of the market, from which normative theories of
marketing can emerge.
Acknowledgments The authors would like to thank Heiko Wieland,
Kaisa Koskela-Huotari and Zhen Tang for their assistance with the
drafting of this article.
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