Adrian Payne, and Pennie Frow, Cranfield School of Management, UK Kaj Storbacka, Nyenrode Business Universiteit, Netherlands
Abstract
The traditional goods-dominant (G-D) logic of marketing is being challenged and focus is shifting to a new service-dominant (S-D) logic for marketing. Central to this new logic is a foundational proposition that the customer becomes ‘a co-creator of value’. In this paper the authors review the development of S-D logic, explore co-creation of value in the context of this logic, and develop a new conceptual framework for managing co-creation.
Service-Dominant Logic and Co-Creation of Value
For a decade or more there have been calls for a paradigm shift in marketing (e.g. Grönroos 1997; Gummesson 1997; Sheth 1996). Of increasing prominence in this debate is the work of Vargo and Lusch (2004; hereafter V&L) who have developed a comprehensive foundation for a new service-dominant (S-D) logic in marketing. Central to S-D logic is a focus on value-creation that involves the customer as a co-creator of value (V&L 2006:181). V&L (2004) unite a number of different marketing concepts and perspectives that emphasize a shift from a company-centric view of value creation to one that focuses on the role of customer. S-D logic is based on a total of nine Foundational Propositions (FPs) (V&L 2004; 2006). In this paper we focus on one key FP: “The customer is always a co-creator of value”.
Today, customers have more opportunity to create value through joint development of goods and services and increased interaction. The terms co-production and co-creation are
increasingly used to describe this interaction; we use the term co-creation in this paper. The origins and literature relating to co-production and co-creation are reviewed by Ramirez (1999) and Bendapudi and Leone (2003). Of particular relevance to co-creation in the context of S-D logic is work by Prahalad and Ramaswamy (2000; 2003; 2004) who characterise customers as moving from a ‘passive audience’ to ‘active players’. A decade ago Schrage (1995) identified the need for “creating tools for co-creation”. However, our literature review identified little work, since then, on developing frameworks for managing the co-creation process. We address this gap in the literature by developing a new process-based conceptual framework for value co-creation that focuses on customer processes, supplier processes and the relationship processes that need to be managed between them.
A Strategic Framework for Co-Creation
Conceptual frameworks are based on combining previous literature, common sense and experience Eisenhardt (1989). We adopt this approach in developing the framework presented in this paper. We integrated relevant literature with experience and learning from field-based research with managers. This included a series of three one-day workshops with senior managers from 18 large organizations plus a number of company case studies. Six of these were major global companies; the remaining twelve companies were major regional or national firms. The interaction with the organizations involved senior level executive vice presidents and their direct reports. This utilized ‘interaction research’ (Gummesson 2002)
where interaction with such groups of managers plays a crucial role in research and that testing concepts through such interaction is “an integral part of the whole research process”. The strategic framework we develop starts with recognition of the centrality of processes in co-creation. V&L observe S-D logic is grounded “on process management” (2004). There is now increasing recognition of the important role of processes (e.g. Srivastava, Shervani and Fahey 1999). S-D logic suggests that marketing should be viewed as a set of processes and resources with which the company creates value propositions. Our literature review and field-based research with managers highlighted the need for a process-field-based co-creation framework
that consists of three main components: the customer’s value-creating process; the supplier’s
value-creating process, and the relationship processes. These three key processes form the key components of the framework for co-creation outlined in Figure 1. The iterative and recursive nature of co-creation is represented by the arrows between the processes.
Figure I: A Strategic Framework for Co-Creation
Cust
omer
Processes
Total Relationship Experience
Thinking Feeling Doing
Customer Learning and Relationship Strength
Cust omer P roces ses Total RelationshipExperience
Thinking Feeling Doing
Cognition Emotion Behaviour
Customer Learning and Relationship Strength
S
u
pp
lier
Processes
Relationship Experience Design Option Management Planning Implementation & Metrics S u pp lier Processes
Co-creation & Relationship Experience Design Option Management Planning Implementation & Metrics Co-creation Opportunities Planning Implementation & Metrics
Organizational Learning and Knowledge Management
Rel a ti onshi p P roces ses
The Customer’s Value-Creating Processes
The total relationship experience: cognition, emotion and behaviour:
In the customer processes element of the framework there are three components of the ‘total relationship experience’: cognition, emotion and behaviour are outlined. Over time,
encounters and interactions result in customer learning and relationship strength. Experiences are situated in time, constructed subjectively and afterwards remembered through processes of cognition, emotion and behaviour. The customer’s experience of a provider, a service, or a product is a result of their cognitions, emotions and activities during the relationship. Because customers’ own resources limit their ability to produce value, the supply can achieve
improved competitiveness if they distribute resources to customers (e.g. products, services,
knowledge, or skills) to help them achieve or improve their own value creation.
Customer learning and relationship strength:
By understanding the customer’s cognition, emotion and behaviour, the supplier can shift its focus from communications aimed at attention-seeking to dialogue and support of customer’s learning. The supplier can support customer learning by developing processes which take into account the customer’s capabilities to learn. If the supplier offers a superior value proposition to those of its competitors over time, there should be an increase in the relationship strength. Customer learning can take place at different levels, at which the process complexity differs (Argyris and Schön 1976). Deeper forms of learning help create greater relationship strength by building deeper bonds between supplier and customer.
The Supplier’s Value-Creating Process
Co-creation opportunities, planning, implementation and metrics:
From the perspective of the supplier, creating value for the customer commenceswith
understanding the customer’s value-creating processes. Co-creation opportunities represent strategic options for companies to create increased meaning and relevance for their customers. The types of opportunity are largely contingent on a company’s industry, their offerings to the customer and the nature of their customer base. Whilst customer research and innovation within the company should drive opportunity analysis, three types of co-creation opportunity should also be considered: opportunities provided by technology breakthroughs; opportunities provided by changes in industry logics; and opportunities provided by changes in customer preferences and life styles. Having identified co-creation opportunities, the focus shifts to planning, implementation and feedback. Planning in the context of supplier processes involves many of the traditional approaches to marketing planning and implementation (e.g. McDonald 2002). The development of appropriate metrics should be a key element of the supplier’s processes. A consideration of the ‘return on relationships’ proposed by Gummesson (2004) can assist in identifying metrics relevant to both the customer and the supplier.
Organizational learning and knowledge management:
S-D logic stresses knowledge as a key operant resource. Mokyr (2002) suggest knowledge is composed of two parts: propositional knowledge, which is abstract and generalized; and prescriptive knowledge, which involves techniques. These techniques comprise the skills and competences that companies can use to gain competitive advantage (V&L 2004). A recursive process of organizational learning and knowledge management places continual emphasis on knowledge as the fundamental source of competitive advantage, the basis of V&L’s
Foundational Proposition 1.
The Relationship Process
The relationship process involves a series of encounters, interactions and transactions occurring between the customer and the supplier. In Figure 1 we represent these activities with a series of two-way arrows linking the customer processes with the supplier processes. Three broad forms of encounters that facilitate co-creation were identified: communication encounters, usage encounters, and service encounters. Identifying and mapping encounters for each of these phases helps develop insight into how a customer and supplier experience the relationship. Whilst the types of content will vary greatly according to the context, some
examples are: emotion-supporting encounters - themes, metaphors, stories, analogies,
recognition, new possibilities, surprise, design; cognition-supporting encounters - scripts,
customer promises, value-explaining messages, outcomes, references, testimonials,
functionality; and behaviour and action-supporting encounters - trial, know-how
communication, the usage of the product, testing features. S-D logic also changes our view of marketing communication and dialogue. The common denominator of the traditional
dominant logic of marketing has been to view the customer as an operand resource - to view the customer as a recipient of the stimulus sent by the communicating firm and analyze the behavioral response. Ballantyne and Varey (2006) persuasively argue for a shift to dialogical orientation so that value is co-created via dialogue and learning. The customer needs to be engaged in a ‘sense-making’ process: the more the customer learns about a provider’s value proposition - how to use it, how to interact with it - the more value is created. This means that the real value-added is not only about providing information or influencing feelings, it is creating processes to support the total customer experience (e.g. Pine and Gilmore 1999).
Planning for Co-Creation: from Framework to Execution
Our experience in using this framework with companies to explore co-creation highlighted that one element, encounter mapping of processes, required more detailed discussion. This is of importance for two reasons. First, encounters should be viewed as mechanisms for
identifying ‘micro-specialized competences and organizing them into the improved forms of complex services that are demanded in the marketplace’; the basis of the important new FP 9 (V&L 2006). Second, companies had difficulties in undertaking this activity; but it
represented activities from which they derived most benefits in planning co-creation. Several mapping processes have been used by researchers (e.g. Shostack 1984; 1987; Kingman-Brundage 1989). We adopt one that changes focus from largely internal supplier processes, to
more emphasis on the customer’s own processes in order to explore co-creation opportunities.
We now illustrate this approach by reference to a travel company, one of our company case studies. This company had made a decision to focus on encounter processes relating to tour
travel. In Figure 2 we summarize the customer’s processes, the encounter processes needed
and the supplier’s supporting processes, when offering a tour travel service.
Figure 2: Encounter Mapping of Customer, Supplier and Relationship Processes
• Advertisement • Direct mail (letter) • Contact request
• Discussing plans • Budget proposal • Brochure • Direct mail (letter) • Good to
know-document • Who are
we-advertisement
• Brochure • Sales call (phone or
meeting) • Application forms • Billing • Ticket • Good-to-know document • Discussions about arrangements • Insurance • We’re-on-holiday postcard
• Check list for those at home • Check calls • Escort/guides • Map • Good-to-know document • Feedback form • Feedback discussions • Welcome home letter/package • Offering • Credit note / additional bill • Home transportation Goals in life • Relaxation • Experiencing new • Holiday plans • Keeping up friendships • Social intercourse • Developing hobbies • Keeping up language skills Travel plans
• Deciding time & destination • Checking financial
situation • Collecting info • Applying for credit
card, passport • Deciding number of participants • Considering age of children, health, safety, insurance Decision making • Applying for vacation • Choosing destination • Informing the family • Booking • Booking someone
to take care of the house, flowers, dog • Making use of benefits Preparations • Paying • Insurance & vaccinations • Currency, passport, visa • Luggage acquisition • Preparations for journey • Packing • Buying film • Gathering info • Getting babysitter Journey • Waking up & transportation • Airport transportation • Finding the hotel • Accommodating • Buying a map • Buying tax-free • Destination services • Participating in trips on site • Send postcards Follow-up • Giving feedback • Laundry, un-packing • Giving souvenirs • Groceries • Informing relatives • Personal follow-up (solarium, sickness) • Currency exchange • Taking care of mail
and bills Goals in life • Relaxation • Experiencing new • Holiday plans • Keeping up friendships • Social intercourse • Developing hobbies • Keeping up language skills Travel plans
• Deciding time & destination • Checking financial
situation • Collecting info • Applying for credit
card, passport • Deciding number of participants • Considering age of children, health, safety, insurance Decision making • Applying for vacation • Choosing destination • Informing the family • Booking • Booking someone
to take care of the house, flowers, dog • Making use of benefits Preparations • Paying • Insurance & vaccinations • Currency, passport, visa • Luggage acquisition • Preparations for journey • Packing • Buying film • Gathering info • Getting babysitter Journey • Waking up & transportation • Airport transportation • Finding the hotel • Accommodating • Buying a map • Buying tax-free • Destination services • Participating in trips on site • Send postcards Follow-up • Giving feedback • Laundry, un-packing • Giving souvenirs • Groceries • Informing relatives • Personal follow-up (solarium, sickness) • Currency exchange • Taking care of mail
and bills
Support of guidelines
• Supporting the mission of customers that want to travel • Improving brand recognition • Attractive marketing commincation Planning support • Planning budget • Own contact person
at travel agency • Travel consulting • Updating customer information • Sending offering • Sending Good-to-know material • Checking customer’s timetable Support of decision making • Consultative sales • Information support • Idea generation Preparation support • Taking care of travel documents • Exchanging currency • Booking tickets • Insurance informing • Insurance acquisition • Sending Good-to-know material • Sending checklist Implementation support • Informing, sending material • Copying maps • Giving contact information • Organizing airport transportation Follow up support • Welcome home-letter • Airport transportation • Contacting • Taking care of feedback • Billing / crediting Support of guidelines • Supporting the mission of customers that want to travel • Improving brand recognition • Attractive marketing commincation Planning support • Planning budget • Own contact person
at travel agency • Travel consulting • Updating customer information • Sending offering • Sending Good-to-know material • Checking customer’s timetable Support of decision making • Consultative sales • Information support • Idea generation Preparation support • Taking care of travel documents • Exchanging currency • Booking tickets • Insurance informing • Insurance acquisition • Sending Good-to-know material • Sending checklist Implementation support • Informing, sending material • Copying maps • Giving contact information • Organizing airport transportation Follow up support • Welcome home-letter • Airport transportation • Contacting • Taking care of feedback • Billing / crediting S u p p lie r p roc e ss e s Cu stomer p roc ess e s Encou n ter s
In order to design encounters, a supplier needs to fully understand the customer’s context. Then, based on a deep understanding and description of the encounters, the supplier process can be designed to facilitate the fulfilment of appropriate encounters. The basis for Figure 2 (and the other cases studies not discussed here) was developed in a facilitated workshop process by managers and front line employees. Figure 2 can be viewed as a codification of the compounded tacit knowledge that the employees had assimilated as a result of their long experience in the industry. In an iterative process, participants were asked to map the processes for a specific customer type on an activity level. The need and concerns for each process were analysed and encounters were designed, based on this understanding. Different categories of encounters were also defined. In the first two processes, ‘goals in life’ and ‘travel plans’, the emphasis is on communication (e.g. advertisements, brochures), and service encounters (e.g. discussing plans, contact request). Later in the process, the emphasis is more on supporting the customer during usage encounters (e.g. ‘good-to-know’ information, check lists, maps).
These encounters need to be designed in such a way that the customer can make preparations for the trip well advanced of departure. This puts an emphasis on designing encounters that ‘educate’ the customer regarding all the possibilities at the destination and, thus, enable co-creation. The goal and the meanings of each encounter should be defined from a customer learning point of view. Some of the encounters have goals that aim at supporting cognition (e.g. educating the customer about the destination, useful -to-know briefing documents, check-lists), whereas others aim at supporting the formation of favourable emotions (e.g. advertisements about travel destination to create interest and desire, ‘check lists’ for those at home to deal with problems). Other important encounters aim at supporting behaviour (e.g. customer retention and repeat business). The interactions in Figure 2 also raise the issue of communication and dialogue. An examination of the processes and encounters in this figure suggests that effectiveness of the overall process is highly dependent on achieving an appropriate division of processes. By enabling the customer’s active participation in some processes, the supplier can manage with fewer resources. This requires an ability to manage expectations and promises between all parties involved throughout the process.
Discussion
Our work, in common with most research, has limitations. It has been challenging to
condense a detailed literature review, discussion and justification of the model, and examples from company-based research into less than one quarter of the paper’s original length.
However, we have attempted to explain and summarize the key elements of the framework and present one example from the field-based research we have undertaken. This paper has focused on the business-to-consumer market. Testing our framework in other sectors is an objective of future work. A considerable number of the contributions in the recent edited work by Lusch and Vargo (2006) identifiy general and more focused research agendas in much detail; we do not attempt to summarize or repeat these already-published research
agendas here.
From its conception, there has an intense debate by researchers regarding S-D logic, with challenges and calls for specific adaptations or elaborations. Our contribution to the evolving S-D debate is both theoretical and practical. First, our theoretical framework draws together several streams of work within the evolving S-D logic literature and its foundational
propositions. These include the role of customer and supplier; the customer as a co-creator of value; knowledge as a fundamental source of competitive advantage; and the focus on operant resources as the key unit of exchange. Our framework highlights: the roles of customer and supplier; how, together, they create value; and, the importance of core competences such as learning and knowledge. Second, our contribution is practical, and is aimed at providing managers with a framework and tools for managing the process of value co-creation. We explored with managers how the process of value co-creation occurs in practice and utilized their operant resources of knowledge and skills in developing and refining our framework. In our work we designed process maps of how customers and suppliers interact together to determine the best use of their resources; and, observed managers and their customers, identifying the role of each party in co-creating value. Our research involved discussions with customers and their suppliers, seeking to understand the complex process of value co-creation. The conceptual framework we develop is grounded in business practice in leading global and national organizations and aims to provide a best-practice road map for managers. Thus, it fits with Bolton’s (2006) observations regarding S-D logic’s pragmatic concern for theory that can identify ‘best practices’ for business.
References
Argyris, Chris and Schön, Donald, 1976. Organizational Learning: A Theory of Action
Perspective, Addison-Wesley, Reading, MA.
Ballantyne, David and Varey, Richard J., 2006. Introducing a Dialogical Orientation to the Service-Dominant Logic of Marketing. In: Vargo, Stephen L. and Lusch, Robert F. (Eds.). Toward a Service Dominant Logic: Dialog, Debate, and Directions. M.E. Sharpe, Armonk, New York, pp. 224-235.
Bendapudi, Neeli and Leone, Robert P., 2003. Psychological Implications of Customer Participation in Co-Production. Journal of Marketing 67 (January),14-28.
Bolton, Ruth N., 2006. Foreword. In: Robert F. Lusch and Vargo,Stephen L. (Eds.) The
Service Dominant Logic of Marketing: Dialog, Debate and Directions.: M.E. Sharpe, Armonk, New York, ix – xi.
Eisenhardt, Kathleen M., 1989. Building Theories from Case Study Research. Academy of Management Review 14 (March), 532-50.
Grönroos, Christian., 1997. Value-driven Relational Marketing: from Products to Resources and Competencies. Journal of Marketing Management 13 (July), 407-419.
Gummesson, Evert. 1997 Relationship Marketing as a Paradigm Shift: Some Conclusions
from the 30R Approach. Management Decision5(4),67-272.
Gummesson, Evert, 2002. Practical Value of Adequate Marketing Management Theory.
European Journal of Marketing36 (March), 325-49.
Gummesson, Evert, 2004. Return on Relationships (ROR): The Value of Relationship Marketing and CRM in Business-to-Business Contexts. Journal of Business and Industrial Marketing 1 (2), 136-48.
Kingman-Brundage, Jane. 1989. The ABCs of Service System Blueprinting. In: Bitner, M. J.
and Crosby,L.A. (Eds.).Designing a Winning Service Strategy. American Marketing
Association Proceedings Series. Chicago, IL: American Marketing Association, 30-3. Lusch, Robert P. and Vargo, Stephen L.,( Eds.), 2006. The Service Dominant Logic of Marketing: Dialog, Debate and Directions, M.I Sharpe, Armonk, New York.
McDonald, Malcolm, 2002. Marketing Plans. 5th edition, Elsevier, Oxford.
Mokyr, Joel, 2002. The Gifts of Athena: Historical Origins of the Knowledge Economy, Princeton University Press, Princeton, NJ.
Pine, B. Joseph. and Gilmore, James H.,1999. The Experience Economy: Work Is Theatre and Every Business a Stage, Harvard Business School Press, Boston.
Prahalad, C.K. and Ramaswamy, Venkatram, 2000. Co-opting Customer Competence. Harvard Business Review 78 (January), 79-90.
Prahalad, C.K and Ramaswamy, Venkatram, 2003. The New Frontier of Experience Innovation. Sloan Management Review 44 (Summer), 12-18.
Prahalad, C.K and Ramaswamy, Venkatram, 2004. The Future of Competition: Creating Unique Value with Customer, Harvard Business School Press, Boston, MA.
Ramirez, Rafael, 1999. Value Co-Production: Intellectual Origins and Implications for Practice and Research. Strategic Management Journal 2, :49-65.
Schrage, Michael, 1995. Customer Relations. Harvard Business Review (July-August), 154-156.
Sheth, Jagdish N, 1996. Relationship Marketing: Paradigm Shift or Shaft? Paper presented at the Annual Meeting of the Academy of Marketing Science, Miami, FL.
Shostack, G. Lynn. 1984. Designing Services that Deliver. Harvard Business Review (January-February), 133-139.
Srivastava, Rajendra K., Shervani, Tasadduq A. and Fahey, Liam, 1999. Marketing, Business Processes, and Shareholder Value: An Organizationally Embedded View of Marketing Activities and the Discipline of Marketing. Journal of Marketing 63 (Special Issue), 168-79. Vargo, Stephen L. and Lusch, Robert F., 2004. Evolving to a New Dominant Logic for Marketing. Journal of Marketing 68, 1-17.
Vargo, Stephen L. and Lusch, Robert F., 2006. Service-Dominant Logic: What It Is, What It
Is Not, What It Might Be. In: Vargo, Stephen L.and. Lusch, Robert F. (Eds.).Toward a
Service Dominant Logic: Dialog, Debate, and Directions. M.E. Sharpe, Armonik, New York, pp. 43-56.
