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Rethinking economic growth: beyond value exchange

I argue that our traditional view of value, whilst wildly successful in the past, has blind spots that are now presenting challenges to growth (sales and innovation). We call that view value-in-exchange and is built around the view of embedding value in products and exchanging that for other items holding value, usually cash.

Value-in-exhange is deeply ingrained in our thinking and experience. Your employer pays you for the work you do…and we pay manufacturers some of that hard earned money for products they offer. An Aston Martin is often seen as more valuable than a Ford (due to price; not necessarily use); a diamond more valuable than water (again we tend to skip context in our thinking).

The progress economy, however, takes a different view. Instead of chasing value, we should focus on enabling (better) progress; and value emerges from making progress (or more correctly from comparisons of progress). Value is therefore a metric of progress desired, offered, potential, and achieved. Notably, there is no value exchange in the progress economy’s value-through-progress view.

This shift challenges our deeply ingrained assumptions. If value is not exchanged, what, if anything, is being exchanged? How do cash/money, markets, and prices – all clearly existing in our experience – fit? And, at a macro level, what truly drives economic activity?

Fear not, we can explain these phenomena through our progress economy view. Better still, these explanations give us further insights into innovation and sales levers. We start by briefly answering the question of what is exchanged: it is service.

But before we can discuss this exchange further, let’s take a moment to clarify what we mean by service.

What is service?

We will draw a distinction between services (plural) and service (singular)- something Vargo & Lusch do in their service-dominant logic (Vargo & Lusch (2008) “From Goods to Service(s): Divergences and Convergences of Logics”).

It is the singular definition that is of interest to us in the progress economy; whereas the plural definition is likely the more familiar to you.

Services (plural)

Services (plural) are viewed as units of output – the counterpart to goods. This perspective classifies goods and services as distinct categories, with services often seen through the lens of the IHIP attributes described in Parasuraman and Berry’s “Problems and Strategies in Service Marketing”, commonly known as the “5Is” of services:

• Inconsistent – services vary in delivery and quality; whereas goods are consistent and repeatable
• Intangible – while goods are tangible items (let’s ignore digital goods temporarily…), services lack physical form
• Inventory – We can stock and store goods, but service cannot be inventoried
• Involvement – Services require customer involvement; goods don’t need those customer interactions during production
• Inseparability – Service provision and consumption happen simultaneously, unlike goods, which can be manufactured in one place and consumed elsewhere

This rather casts services as inferior to goods. Something promulgated by Adam Smith’s Wealth of Nations (1776), and reinforced through a manufacturing bias ever since. Goods are seen as primary wealth generators, while services play a secondary role. Vargo and Lusch named this way of looking at the world a goods-dominant logic. This logic leads us to a value-in-exchange view of value.

Yet, in “The Four Service Marketing Myths“, Vargo and Lusch challenge these assumptions, arguing that the traditional distinctions between goods and services are misleading.  Here’s what they say (with my annotations in square brackets):

• Unless tangibility has a marketing advantage; it should be reduced or eliminated if possible [enabling rapid scalability]
• the normative marketing goal should be customization rather than standardization [enabling greater progress to individual seeker’s progress sought from their progress origin = greater value emerging]
• the normative marketing goal should be to maximize customer involvement in value creation [enabling greater alignment to individual progress sought from progress origin = greater value co-creation]
• the normative goal of the enterprise should be to reduce inventory and maximise service flows [why tie up cash through storing multiple units that don’t align with individual progress journeys?]

Vargo & Lush (2004) “The Four Service Marketing Myths“ with notes

The alternative is to look at the processes rather than output.

Service (sigular)

Instead of viewing services as a unit of output, we shift our focus to the process of service itself. Vargo & Lusch emphasize this distinction by using “service” in the singular, defining it as:

the application of competences (knowledge and skills) for the benefit of another party

Vargo & Lusch (2008) “From Goods to Service(s): Divergences and Convergences of Logics”

This reframing has two key implications, it:

• directs attention to understanding and developing competences rather than merely categorising outputs
• dissolves the traditional goods-versus-services debate by recognising that goods are simply a means of transporting service (knowledge and skills)
• opens the door to thinking in terms of effort expended in making available and applying those competences (which is key to understanding price in the progress economy)

However, this definition warrants some refinement. Not all service benefits another party—self-service exists. Moreover, service is not limited to applying knowledge and skills; other capabilities, such as physical attributes (eg strength), natural forces (eg movement from wind or waterflow), and abstract elements (eg time), also play a role.

In The Progress Economy, we adopt a broader definition:

service: the application of capabilities (knowledge and skills, as well as physical such as strength, natural such as movement of wind, or abstract such as time) to help oneself, or more often, another party to make progress

Based on Vargo & Lush (2008) “From Goods to Service(s): Divergences and Convergences of Logics”

These capabilities are carried by resources; and making progress is through acts of resource integration. Who applies capabilities (integrates resources) in a service could be the “self”, the service provider, or a combination. This is reflecting in a continuum of progress propositions between enabling and relieving propositions.

Types of service

We can leverage Lovelock & Wirtz’s four types of service processing (from ”Services Marketing”) to further understand service (and functional progress that seekers are looking to make):

• people processing – make progress on a human body (eg healthcare, hair cutting, fitness, nutrition)
• possessions processing – make progress with possessions (eg repair, storing, transporting)
• mental-stimulus processing – make progress with (eg education, gaming, entertainment)
• information processing – make progress that involves manipulating information/data (eg banking, IT services)

Goods in the progress economy

Let’s take a closer look about where goods fit in within this service-first world. They function as distribution mechanism for service (singular). Vargo & Lusch’s service-dominant logic informs us, as one of its foundational premises:

Goods are distribution mechanisms for service provision

#3

What I mean is that the application of competence is frozen into goods, allowing it to be transported in time and space. Future acts of resource integration unfreeze those competencies.

Let’s understand this through listening to your favourite band. From a service view, the band members are applying their instrumental/vocal competences for you to enjoying yourself.

You could listen to this band play live. Here it is clear they are directly applying their competences for your enjoyment. Someone could record the concert (“freezing” the competence application), distribute it on CD, tape, vinyl, or digitally), and then you could “unfreeze” the concert through pressing play on your playback device.

The choice is now not one of services or goods, but of listening live vs listening when you want/can. Each proposition addresses the same broad functional progress (enjoying yourself listening to a band). However addresses different contextual progress (constraints/context) and non-functional progress (thrill of live experience, comfort of where I am)

Effort in a service

It is clearly not an incorrect way to think. GDP per capita in the UK, for example, rocketed from £2,034 in 1776 to £24,402 in 2000 (at constant 2013 British Pounds Sterling). However, it has challenges that I argue are now holding us back. Let’s explore!

Exchanging Service

Actor is seeking to make progress, a progress helper is also a progress seeker (most often in a different domain). This dynamic sets the stage for what we term an exchange — an exchange of help. Aligning us with the first axiom of Vargo & Lush’s service-dominant logic (our foundation):

Service is the fundamental basis of exchange

#1

In its simplest form, a progress seeker and helper engage in a direct exchange of service. However, this service exchange is often indirect and may not be immediately apparent to our minds accustomed to value exchange.

Before delving into direct and indirect exchanges, let’s clarify the meaning of service, a term influenced by goods-dominant logic thinking.

Unbalanced distribution of resource

Driver of economic activity

Direct exchange

Direct service exchange is a straightforward concept: you help me make some progress, and in return, I help you with some progress you are seeking.

Such a direct exchange relies on individuals having skills and knowledge to swap and them finding each other to engage in this exchange. For example friends helping each other move house, participating in getting rounds of drinks during nights out, or doing favours for others.

Direct exchange might well be rare in our complex world, but let’s not write off service as the basis of exchange. Understanding direct exchange, and the challenges it poses, sets us up well to explore the more common indirect exchanges that occur.

Tracking temporal differences

There’s often a temporal gap in a direct exchange. By that I mean I might help you move this weekend, but you might not need my help for months.

To mediate these temporal differences, we introduce the abstract concept of “service credits“. These are promises of future service. When I provide a service to you, you give me a service credit that I can redeem at a later point in time.

These service credits can take various forms, from a mental note among friends to a formal contract, entries on a central or distributed register/ledger, to tokens/IOU notes you carry with you. The formality of service credit implementation is likely to increase with the level of unfamiliarity or trust required between the parties involved.

Aligning magnitude differences

Idealistically one unit of service should be represented by one service credit. But, outside of an altruistic society, that breaks down on views of unfairness. Does you cooking me a meal (or rather you applying your culinary skills for my benefit) equate to me helping you move a 5-bedroom house?

To answer that, we need to introduce the concept of equitable service exchange. Where both parties in an exchange agree the progress they could make (progress potential) with the other’s help is sufficient for the effort they will give in helping the other make progress. Noting that equitable is not the same as equality.

It may be the case that we both feel that a meal in exchange for me helping you move is sufficient. It’s clearly not equal; but if we feel it is equitable, great. Or we could agree that 4 meals is equitable, or 2 meals, or some not yet defined future help.

As with temporal differences, we can mediate magnitude differences through service credits. Where different numbers of service credits can be agreed for each service being exchanged. We might, for example agree that my helping you move is equitable to two meals. So you would offer me 2 service credits if my service was performed first.

And here we begin to get a glimpse into price in the progress economy. Price signals a formalisation of the effort a helper puts into providing help; expressed in terms of number of service credits and the number of exchanges they believe is required for equitability.

More on price, and implications for business model innovation, later.

Now we have this basis of direct exchange, let’s look at indirect exchange.

Indirect exchange

Your experience likely tells you that direct exchanges are not that common. Does that mean our concept of service as the basis of exchange is incorrect? No. As service-dominant logic tells us, the service basis of exchange is masked by indirect exchange.

Indirect exchange masks the fundamental basis of exchange

#2

The most obvious indirect exchange is what we’ll call transitive indirect exchange. I help you and receive a service credit. Our previous intention was I would redeem that with you at a later date. However, what if there’s another progress helper offering to help me with something else I need to progress with, that you can’t. If they decide to accept your service credit from me (perhaps they want your help) then we have a transitive indirect exchange.

Vargo and colleagues identify in 2010’s “Service-dominant logic a review and assessment” four ways that indirect exchanges mask direct service exchange.

These we will call:

• transitive indirect exchange – money (as an implementation of service credits) as a medium of exchange
• distributable indirect exchange – goods as distribution channels for service
• internal indirect exchange – organisations as resource integrators
• network indirect exchange – networks as linkages for exchange –

Let’s explore them in a little more detail.

Transitive indirect exchange – lubricated by service credits

Let’s say I help you progress and in return you give me a service credit. The original intent of that, in direct exchange, is that I will use that credit at a later date to call on your help.

Now, maybe there’s another progress helper that is willing to accept that service credit as a call on their help instead of me helping them progress. So I can get help from them by using the credit I received from helping you.

This is a transitive indirect service exchange; lubricated by service tokens.

In reality, we would also need to mediate magnitude differences between service involved through service credits.

It doesn’t require all three parties to pre-agree what level of effort is involved with a unit of service credit; but the equitability service exchange progress hurdle brings that alignment.

That gives us another insight into price. Service credits now represent effort a seeker has to put into helping someone else to get the credits required for a service they want.

[A question to, perhaps, resolve later is if transitive indirect exchange is eventually circular]

Distributive indirect exchange – the curious case of goods

The use of goods also mask that service is the fundamental basis of exchange. We’ve already noted above that our current goods-dominant logic puts outputs first. Which implies those outputs (products: goods and services) have value embedded within them. So we exchange that embedded value for other items that have value, typically cash.

Goods, in our service-first world, function as a distribution mechanism for service. Again, service-dominant logic informs us:

Goods are distribution mechanisms for service provision

#3

In practice this means that the application of competence is frozen into goods, allowing it to be transported in time and space. Future acts of resource integration unfreeze those competencies.

A band playing music is a service—musicians applying their instrumental/vocal competences to help others make progress (for example, in enjoying themselves). Their performance can be frozen as a digital file by recording it, which can be distributed as a CD (traditional tangible goods) or streamed over the internet (as an intangible digital goods). When a listener presses play on Spotify or their CD player —a resource integration activity—the performance is unfrozen.

However, in our service-first perspective we see that goods freeze skills and knowledge allowing them to be distributed.

In this perspective, goods freeze skills and knowledge, allowing them to be distributed elsewhere. We still have service as the basis of it is just masked by distributive (often together with transitive) indirect exchange.

For example, pouring a glass of water from a tap/faucet is generally seen as using a service; whereas that bottle of water in the fridge is seen as a product. In the progress economy they are interchangeable resources.

Internal indirect exchange

The third example of indirect masking is found in organisations. Organisations integrate and combine micro-specialisations into a progress helper. By that I mean various departments, assembly line workers, layers of management, etc. When we look, there are often limited, or no, direct service exchanges between these micro-specialisms.

However, when we zoom out we can see a special case of transitive indirect service exchange at play, which we call internal direct exchange.

Each employee/department is applying their skills and knowledge to help the organisation help the progress seeker. Most likely the seeker is giving servce credits to the organisation, which then distributes those across departments/ emloyees.

network indirect exchange

A similar situation to internal indirect service exchange happens in ecosystems – where a group of progress helpers co-ordinate to help a progress seeker. Sometimes behind a progress seeker acting as a façade; sometimes linked from a progress seeker but direct with the seeker (for example external party credit card payment on e-commerce sites).

Key considerations

Viewing the world as one where the basis of exchange is service (helping make progress) is beneficial to growth as it encourages us to:

• look at how we can help make progress (and therefore what progress for a seeker means) rather than focus on outputs
• see that value emerges from making progress rather than being embedded
• remove an obsession over an artificial point of exchange
  • opportunities before that point become more visible
  • opportunities after that point become more visible
• harness the circular economy
• lose the restricting view that goods and services are competing entities
  • and that services are poor in comparison to goods

Temporal and magnitude differences between service swapped are mediated by value-less service credits. And those same credits lubricate transitive indirect service exchange – I help you, you give me service credit(s), I use those to get progress helper’s help.

Which leads us into insights on price in the progress economy that is interpreted by progress seekers as effort in service they need to provide elsewhere in order to obtain (service credits to obtain) a service they are after.

In fact, indirect service exchange masks service as the basis of exchange just as service-dominant logic tells us. We find transitive, distributive (service frozen in goods), internal and ecosystem indirect exchanges.

Finally, we believe we see a world of value exchange due to the particular implementation of service credits we call money and its use in indirect exchange. But that is a restrictive world when looking for growth, innovation and the circular economy. It’s time we dug deeper into the true underlying service basis of exchange.