Value co-creation process

Value co-creation is defined as the process of joint value creation based on interactions, active dialogue, and co-building experiences between the organisation with its clients (Grönroos & Voima, 2013; Gummerus, 2013; Ng & Smith, 2012; Prahalad & Ramaswamy, 2004) and other stakeholders (Rod et al., 2014; Roser et al., 2013). This collaborative process requires generating opportunities for co-production, integrating resources and applying individual competencies (Vargo et al., 2008) where the beneficiary determines the perception of what is received (Rod et al., 2014). Four theories support the process of value co-creation, namely: social exchange; relational view of the firm; relational contracting; and stakeholder theory. These theories are described in the following subsections.

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2.3.2.1 Social exchange theory

Stemming from sociology and social psychology, social exchange theory (SET) is a frame of reference that analyses the flow of valued resources as a social process where longitudinal exchange relations and network structures are developed to aggregate value for the parties (Emerson, 1976). The interdependence between exchange parties (i.e. mutual efforts to achieve the outcomes) encompasses joint gains during the process of transaction over time through knowing the partners’ preferences and shared interests (Zajac & Olsen, 1993) as well as reducing exchange risks such as opportunistic behaviour, thereby encouraging mutual collaboration (Cropanzano & Mitchell, 2005; Molm, 1994). Therefore, the largest source of value creation in SET is the parties’ interdependence or relationship (i.e., series of interdependent exchanges) (Molm, 1994).

2.3.2.2 Relational view of the firm

The relational view of the firm stresses the relationship between organisations as the main focus for analysing potential sources of competitive advantage (Dyer & Singh, 1998).

Based on the partnership and alliancing research literature, Dyer and Singh (1998, p. 662) declare that a relational rent refers to “a supernormal profit jointly generated in an exchange relationship that cannot be produced by either firm in isolation and can only be created through the joint idiosyncratic contributions of the specific alliance partners”. This relational view demands potential sources of value creation (Amit & Zott, 2001). For example, relational-specific assets create relational rent when safeguards, such as the contract length, and the volume of transactions are both significant (Dyer, 1997; Dyer & Singh, 1998).

Knowledge-exchange, the degree of compatibility in inter-organisational systems and processes, and the choice of effective governance for minimising transaction costs and maximising value creation initiatives also represent sources of value creation underpinned by this relational perspective (Dyer & Singh, 1998; Hamel, 1991).

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2.3.2.3 Relational contracting

Relational contracts divulged by Macneil (1985) recognise informal agreements and unwritten codes that may significantly affect the behaviour of the parties in an inter-organisational relationship (Baker, Gibbons, & Murphy, 2002). In this sense, the contract has less prominence than the relationship itself, where relational norms such as trust, honesty, and accountability become critical to achieving the desired benefits (Colledge, 2005). Hence, these types of contracts, unlike discrete transactions, are more complex and of long-term duration, and require flexibility to be effective (Macneil, 1977). The long-term nature of relational contracting reduces the possibility of opportunistic behaviour between the parties because it includes mechanisms to share and reduce risks, consequently maintaining an ongoing relationship of mutual advantage (Bultler & Baysinger, 1983). Moreover, relational contracting helps the parties to use their knowledge in specific situations that may appear and adapts newly available information across the relationship (Baker et al., 2002). Mutual trust, commitment (i.e. win-win strategy) and exchange of knowledge and information to generate innovation for both parties are leading sources of value from relational contracting (Colledge, 2005).

2.3.2.4 Stakeholder theory

Stakeholder theory focuses on maximising benefits by establishing favourable relationships between interested parties (Freeman et al., 2010). Although traditionally short-term economic and financial goals have represented the main measure of the value of an organisation, value maximisation through maintaining close relationships with stakeholders to ensure their satisfaction can increase long-term returns (Harrison & Wicks, 2013; Jensen, 2001). Stakeholders (i.e. owners and investors, employees, clients and users, suppliers, local communities and government agencies) are a related group or individuals that contribute to create value because they may affect or be affected by the achievement of the goals of the firm (T. Donaldson & Preston, 1995; Freeman et al., 2010; Harrison & Wicks, 2013; Jensen,

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2001; Lepak et al., 2007). From this perspective, firms should work toward managing stakeholder interests in order to reduce conflicts and related monetary losses (Harrison &

Wicks, 2013). As declared by Freeman (2010), the performance of the firm is directly associated with the measure of the total value created by the firm through its products and activities, which represents the sum of the utility generated for each stakeholder in the firm.

This theory supports value creation because strong and close interactions between interested parties generate opportunities to reduce conflicts and improve cooperation, consequently increasing the likelihood of creating value in the form of long-term benefits for the focal firm and its stakeholders (Freeman et al., 2010; Harrison & Wicks, 2013; Jensen, 2001).

Table 2.3 displays a summary of the theories that underpin the process of co-creating value, including a description of each theory as a source of value creation, and the relevant prior representative research.

Table 2.3: Theoretical foundations for value co-creation process

Theory Sources of value creation Representative research Social exchange

theory

 Interdependence between exchange parties for joint value maximisation.

(Cook, Cheshire, Rice, &

Nakagawa, 2013;

Cropanzano & Mitchell, 2005; Emerson, 1976; Molm, 1994; Zajac & Olsen, 1993)

 The development of trust, loyalty, mutual commitments and inter-organisational learning between exchange parties.

Relational view of the firm

 Relation-specific investments through a greater length of safeguards and volume of transactions.

(Dyer, 1997; Dyer & Singh, 1998; Hamel, 1991)

 Inter-organisational knowledge-sharing routines by absorptive capacity and alignment of incentives.

 Complementary resources and capabilities based on prior relational experiences and inter-organisational

compatibility of systems and processes.

 Effective governance selection oriented to

self-enforcement governance (e.g. trust) rather than third-party enforcement governance (e.g. contractual agreement).

Relational contracting

 The development of mutual trust and commitment in long-term inter-organisational relationships.

(Baker et al., 2002; Bultler &

Baysinger, 1983; Macneil, 1977, 1985)

 Flexibility for adapting to new situations in complex environments.

Stakeholder theory

 Close relationships between interested parties. (T. Donaldson & Preston, 1995; Freeman, 1999;

Freeman et al., 2010;

Harrison & Wicks, 2013;

Jensen, 2001)

 Reduction of conflicts and increase of cooperation with stakeholders through shared norms such as fairness and trust.

 Early stakeholder’s engagement.

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Theories such as social exchange theory, relational view of the firm, relational contracting and stakeholder theory provide strong support for conceptualising value co-creation. As proclaimed by Prahalad and Ramaswamy (2004), co-creating value is the process in which clients and suppliers jointly create value, mainly through high-quality interactions above and beyond the traditional focus, where the generated value is inside the firm through its products, activities and competences (i.e. independent value creation). In the process of co-creation, the parties must seek one another's active participation beyond the regular arms-length type of relationship (Hammervoll, 2012; Nord, 2012). Accordingly, a relational approach underpinned by effective collaboration in terms of high resource complementarity, distinctive competences and strongly linked interests (Austin & Seitanidi, 2012), becomes a critical undertaking to face more complex and uncertain environments.