CHAPTER TWO VALUE CO-CREATION A CONCEPTUAL APPROACH

Transcription

1 CHAPTER TWO VALUE CO-CREATION A CONCEPTUAL APPROACH 2.1 CUSTOMER VALUE Creating customer value is a distinct source of competitive advantage (Woodruff, 1997) 1. The value is always perceived in a individual way by the customer (Gronroos C., 2011) 2 and value is a very complicated concept to define (Woodall, 2003) 3. Several researchers have tried to define the concept of value from a variety of perspectives. The economic-based analysis suggests that the customers use up their income in order to make best use of their satisfaction (Bowman and Ambrosini, 1998) 4. Value is also defined as the feeling of being better-off in some manner than before availing the service (Gronroos, 2008) 5. Value can be exchanged through the transaction between two or more parties (value in exchange) as per the exchange theory (Kotler, 1972) 6. In this theory, the concept of value is not only limited to goods or services or monetary exchange, however also resources such as feelings, energy and time. The idea of value plays a very critical role in most business models (Khalifa, 2004) 7. It is the principal source of competitive advantage and (Lin et al., 2005) 8 it has been extensively acknowledged that customer value delivered leads to customer loyalty, which consecutively has a direct relation with profits. The loyalty of customers remains with a company on condition that it is able to provide superior value, in comparison with its competitors. 7

2 In 1990s the idea of customer value was generated, and ever since scores of researches have happened on this concept. It finds use in many kinds of marketing domain literature, which generally includes marketing, strategic marketing, consumer behavior, relationship marketing, customer relationship management, co-creation of value etc. The multifarious researches, conducted in diversified contexts, have resulted in a complex, and rather puzzling understanding, regarding the idea of customer value (Khalifa, 2004) 7. All different models of customer value are commonly grouped below as four wide categories (Simova, 2006) 9. These are: Value components models are based on the argument that customer value is comprised of value elements. Kaufman (1998) 10 suggests that the customer value is made up of three sub-components, esteem value, exchange value and utility value, corresponding to want, worth and need correspondingly. So, every shopping decision is made derived from a combination of these three sub-components. Kano s Model (2001) 11 is another popular value component model, which talks of basic, performance and delight elements. These value components correspond to must be, more is better and excitement aspects respectively. So, the customer s buying decision is influenced by any combination of these three components. The satisfaction level of customers can range from dissatisfaction to being neutral or feeling delighted. Absence of basic and performance elements can lead to customer dissatisfaction; the delight factor is mostly unexpected, and its presence obviously makes the customer feel delighted. But, the other side of this concept is, that the customer s 8

3 level of expectation is not static and keeps on increasing with time.(khalifa, ; qtd. in Simova, ). Means-Ends models are developed around the concept that, the customers purchase goods and services, in order to accomplish their desired ends. So, the means are the goods and services and the ends are the desirable personal values. The customer s buying decision is based upon the perception of how efficiently the product attributes on consumption, can lead to desirable consequences (qtd. in Simova, ). Benefits-Costs ratio models define customer value as the difference between customers perceived benefits and the customer are perceived costs (Day, 1990) 12. Value is understood as customer s complete evaluation of the market offering s utility, which is based on the customer s perception of what he loses and what he gains (Zeithaml, 1988) 13. However, this definition has been countered by other researchers. According to them, perception of value is the outcome of trade-off between the benefits they receive from the product and the sacrifice they make in order to pay the price (Simova, 2006) 9. The customers receive benefits from the product in the form of both tangible and intangible attributes of the offering. The sacrifice made in order to pay for the price can be both monetary and non-monetary. Non-monetary factors include time, effort in acquiring the final benefits (monetary efforts, time efforts, search efforts, learning efforts, emotional efforts, cognitive efforts and physical efforts) and the risks taken (financial risks, social risks and psychological risks) (qtd. in Simova, 2006) 9. 9

4 Combined Models of Customer Value, have evolved in order to overcome the shortcomings of the above stated models. The above three models are incomplete individually and explain the concept of customer value in a limited scope. Khalifa (2004) 7 proposed that there are three complimentary viewpoints, required to explain the concept of customer value. These are value exchange model (basically benefitscosts ration model), value build-up model (the relationship aspect of value exchange, that whether it is a simple transaction or a genuine interaction) and dynamic customer value (customer s overall assessment of the provider s total offerings in comparison with the combined personal needs) (qtd. in Simova, 2006) 9. Payne and Holt (1999) 14 of in their working paper by the title Diagnosing customer value: A review of the literature and a framework for relationship value management, have reviewed antecedents and recent perspectives on customer value. The following reviews on customer value are based on their research work. The four most influential antecedents of value and customer value were identified as: Values: Consumer values & consumer value, Product: Augmented product concept, Satisfaction: Customer satisfaction and service quality and, System: The value chain. In addition, there are three more new outlooks on value and customer value are Customer perceived value, Value of the customer and Creating and delivering customer value. 10

5 Table 2.1: Value and Customer Value: Influential antecedents and Recent Perspectives (Source: Payne and Holt, 1999) 21 Consumer Values and Consumer Value Augmented Product Concept Consumer Satisfaction Level; and Quality of Service The Value Chain Creating and Delivering Superior Customer Value Value of the Customer Customer-Perceived Value Researched extensively in the 1970s and 1980s. Major contribution by Gutman (1982) 15. Developed by Levitt (1980) 16. He proposed that in addition to the generic or the core product, there also exists and expected product, an augmented product and a capability product. It is concerned with the measurement of outputs in terms of value. Focuses on measurement of multi-attribute model, e.g., Parasuraman et. al., (1985) 17 & (1988) 18. Based on the previous works, Porter (1985) 19 introduced the concept of Value Chain, for identifying how value is created within organizations. This concept has been recognized widely as the key activity for generation of competitive advantage and has become the focus of many researchers e.g., Day (1990) 12. Value of the customer concept considers the profits obtained over a customer s lifetime association with the firm. Hence, consequently, profits can be increased by increasing customer retention (Reichheld and Sasser, 1990) 20. The studies in this area focuses on the customer s perception of value and the efforts in identifying that perceived value which is desirable to the target customers (Woodruff, 1997) 1. Consumer Values and Consumer Value (qtd. in Payne and Holt, 1999) 21 : The works on consumer value has its roots in the literature on human values. However, the two terms, consumer values and consumer value appear to be similar, but actually they are not. The term value suggests preference given to something, whereas, the term values refers to the criteria on which the preference is made (Holbrook, 1994) 22. Classically, values are the enduring beliefs which are deeply imbibed in a person (Rokeach, 1973) 23, whereas, the term value signifies the notion of preference, which can result from evaluation of benefits and costs or the quality of interaction. 11

6 Consumer Values has been researched by several academics like Gutman (1982) 15, who attempted to identify the linkage between the decision-making by consumers in purchase situations and product attributes which can be linked to customer s values. In this field of research, several instruments have also been developed to measure and interpret consumer values. Out of these instruments available, the two most widely used are: VALS (Values & Lifestyles) given by Mitchell (1983) 24 LOV (List of Values) given by Kahle (1983) 25 These instruments try to explore out the target customer s value system and behaviors which can be used to improvise the market offerings as per the consumer type. From the research on consumer values, the concept of consumer value has emerged out. The most noteworthy contribution in this field has been from Zeithaml (1988) 13. Zeithaml proposed a system based on value paid by the customer, customer s perceived quality and customer s perceived value. Zeithaml defined customer value based on four parameters, which are: 1. Perceived lower price 2. What customer desired in the product 3. Quality received against the price paid for the product 4. Overall assessment of exchange of values Another noteworthy view on consumer value has been proposed by Holbrook (1994) 22. Customer value has been defined by Holbrook as an interactive, relativistic and preference experience. He also developed customer value typology 12

7 based on a combination of three dimensions; extrinsic-intrinsic, self-oriented-other oriented and active-reactive. In addition, there are eight types of values involved in consumption experience according to Holbrook. These are namely efficiency (convenience), excellence (quality), esteem (reputation), politics (success), which are commonly found in the mainstream literature. Other than these, Holbrook used some unconventional values such as, spirituality, morality, aesthetics and play. The Augmented Product Concept (qtd. in Payne and Holt, 1999) 21 :This concept was developed by Levitt (1969) 26. According to this concept the actual competition between companies is not for what is being produced in the factories, but what they add to their factory output in the form of packaging, services, advertising, customer advice, financing, delivery arrangements, warehousing, and other things that people value. Later on Levitt (1981) 27 presented the product concept based on following concepts: Generic product Expected product Augmented product, and Capability of product offering Just after proposing the above concept, Levitt (1981) 27 distinguished between the marketing strategies for intangible products and product intangibles. Levitt pointed out that the product from the buyer s perspective is a promise, a cluster of value expectations of which its intangible parts are integral as its tangible parts. Levitt s works produce the concept of customer value as the integral component of the offered product and/or service. So, conclusively, these concepts proposed by 13

8 Levitt are fundamentally useful to bridge the gap between, the traditional marketing viewpoints of the product, considering the set of processes involved in producing a product, and the customer s viewpoints about the final market offering, as a package of solutions to his problems and associated add-on utilities (Christopher et. al., 1991) 28. Levitt s work has become the basis of many further researches. For example, Collins (1989) 29 used the augmented product concept to describe personal computer as the total product from both the consumer and marketer perspective. Similarly, McDonald (1984) 30 and Christopher and McDonald (1984) 30 proposed the concept of product surround, according to which the core product generally accounts for around 80% of the total cost, but it creates only 20% impact on the customer. Contrarily, the product surround which consists of the expected, augmented and the capability product contribute around 80% of the customer impact or in other words customer value. This demarcation was although not empirically proven by these researchers, but, it proved useful in managerial application as a thumb rule. The further studies on the concept of Augmented Product have revolved around determining the set of product surround elements, which are helpful for a specific business. This concept has been put forward as the flower of service model proposed for the service industry by Christopher Lovelock (1995) 31. Lovelock identified a set of eight separate components, which together can be used to add value to the primary market offering. This model given by Lovelock became pretty popular, firstly, because of its wide applicability in diverse business set ups. 14

9 Consumer Satisfaction Level; and Quality of Service (qtd. in Payne & Holt, 1999) 21 : Customer satisfaction has been widely researched by many researchers and has found widespread application in business too. For example, customer feedback forms, attitude surveys, customer feedbacks, complaint forms etc. are being used extensively for past several years. Many researchers in this field have proposed various satisfaction models for customers in various contexts. Most of customer satisfaction research has been focused on individual or customer level instead of organizational level (Anderson and Fornell, 1994) 32. Yi (1991) 33 has presented a detailed review of the customer satisfaction literature. The service quality models based on multiple attributes of service quality and customer satisfaction, like the one proposed by Parasuraman et. al. (1985) 17 are based upon output of values such as index and analysis of customer reactions after availing the desired services instead of evaluating pre-purchase decision-making behavior of the customers. The SERVQUAL model of Parasuraman, Zeithaml and Berry , and , evaluates service quality based on difference between consumer s expected service and consumer s perceived service. The SERVQUAL model was further developed into five dimensions by its proposers in The five dimensions are namely tangibles, reliability, responsiveness, assurance and empathy. It can be clearly deduced from these five dimensions that they are largely inspired by the augmented product concept, as most the dimensions are not concerned about the core or tangible product, rather, they focus upon the associated service elements of the product. 15

10 The SERVQUAL model has made a prominent impact on the management thought of customer value, in terms of measurement of output of values such as index and analysis of customer reactions after availing the desired services instead of evaluating pre-purchase decision-making behavior of the customers. This SERVQUAL model also has been used as a tool to compare the market offerings of different competitors and in several market contexts due to its adaptability and simplicity. The Value Chain (qtd. in Payne and Holt, 1999) 21 : The concept of value chain propounded by Porter (1985) 19 is an umbrella term, which covers several conceptual approaches. These include: Cycle of customer s activities The concept of value system Constellation of values Relationship management concept. The concept of value chain proposed by Porteris rooted in the business system. The business system of McKinsey & Coy was developed by Gluck (1980) 35 and Buaron (1981) 36. But, when Porter s value chain concept was published in 1985, concept of developing competitive advantage by streamlining the internal processes of a business firm was developed. Porter s value chain concept although has been developed from the business system concept, but it still advances from the latter in two fundamental ways. 16

11 Table 2.2: McKinsey s Business System vs. Porter s Value Chain System (Source: Self Compiled) McKinsey s Business System Based upon the activities and the sub-activities in a business. No such concept, as customer s business activities and alignment to these activities. Porter s Value Chain Concept Business functions and the concept that, how the various business functions are inter-woven to each other. Customers also possess a value chain of their own. No matter, whether, they are business customers or individual customers. A firm can gain competitive advantage by aligning its own value chain with the customer s value chain. The concept of value chain was further elaborated by Vandermerwe (1993) 37. Vandermerwe suggested that the customers also possess their own value process, termed as customer s activity cycle. The companies need to identify critical points in their customer s activity cycle and add value to it, hence, the company s value chain does not separate from or sequential to that of the customer, but rather it extends to the customer s value creating chains. An efficient supplier needs to identify non-value adding processes and activities and eliminate them, in order to increase over-all value of the system. McKinsey and co. in 1985 published a description of value delivery sequence (Bower & Garda, 1985) 38. The concept of Value delivery system is also popularly called as: Value Proposition. This ideology suggests businesses to change their perspective of seeing themselves as a system for value delivery, from an external perspective, rather than considering themselves as a set of functional activities. This McKinsey model was further developed by Burns and Woodruff (1992) 39 and the provided a framework for strategy development, which integrates the firm s activities and the customer s value creating activities. This includes five stages: 1) identify the 17

12 value; 2) select desired value; 3) deliver the value; 4) communicate to customer about the value; and 5) assess the value. Another approaches to value system approach are of Jittner & Wehrli (1994) 40 and the concepts given by Piercy (1998) 41. Jiittner and Wehrli described their proposed value system as, system of interdependent actors (within organizations) who raise the total value of the system by interactive value-generating processes which compete with other value systems in the competition system of which they are part. They also provided an ideology, where, marketing management has a new role of coordinating all the interactive value-generating processes for improving firm s performance. Piercy (1998) 41 described about an interactive relationship between analytical/ tactical, behavioural, organizational dimensions, and, the process of value definition, development and delivery which lead to consumer value. Providing superior value to the customers (qtd. in Payne and Holt, 1999) 21 : Creating and delivering superior customer value is one of the recent developments in the field of customer value. Much work in this field has been done in the 1990s, like that of Day (1990) 12. These works are closely related to the concept of urging businesses to adopt market-oriented and customer-oriented approach, mostly inspired by researches on market orientation strategies. Although previous researches in the field of customer value have also focused similarly on becoming customer focused but this recent development of concept makes an attempt to link organizational profitability and performance with the market-orientation and customer focus. This concept professes that the company s success depends largely on how well the company is successful in delivering the customer s what they really value much. 18

13 This philosophy also curtails development of an organizational culture which values market-orientation and development of such dynamic capabilities, which continuously creates superior value for its customers (Slater and Narver, 1994) 42. In this field Bowman and Ambrosini (1998) 4 proposed strategies for creation and capture of value from the customers. This concept was furthered by Buzzell and Gale (1987) 43, by furthering it in the form of Profit Impact of Market Strategy (PIMS) research. Their research suggests that there are four steps for customer value management. These stages are, Stage (1), Conformance of quality, Stage (2), Customer Satisfaction, Stage (3), Value relative to the competitors or, Market-perceived quality, and Stage (4), Management of customer value. The company s efforts to deliver superior value to its customers in the form of product quality does not guarantee the firm s survival, but more important factor for success is the company s ability to deliver better quality, as compared to its competitors (Naumann, 1995) 44. According to Nuamann (1995) 44, service quality and product quality form the two important pillars of value-based pricing. Based on this concept, Naumann further proposed a customer value triad, consisting of: Quality of product Quality of service Pricing based on value A newer concept on customer value was proposed by Knox and Maklan (1998) 46, according to them the companies should examine their value concept again based on the gaps between customer value and brand value. They further argued that brand marketing is not sufficient enough to create long-term strategy of survival; 19

14 rather, companies should explore customer value and translate the value proposition through brand marketing. Naumann (1995) 44 proposed that brands in the coming time will be more recognized by the value they convey to the customers. The Value of the Customer (qtd. in Payne and Holt, 1999) 21 : The understanding of value concept in the purview of the customer value for the organization is also a widely researched area. This ideology is different from other concepts in the field of customer value, as it emphasizes on the value of the customer in the eyes of the organization. This concept does not talk about the creation of superior value for the customers but rather, the value outcome derived from the customers by delivering superior value to the customers. The main concept that forms the popular basis for this approach is of customer lifetime value (CLV). This perspective is closely related to the broader concept of customer retention and customer relationship management. The prominent contribution in this field of customer value research is by Bain & Co. of USA, whose major contribution was the outcome of consultancy services and research done for retention marketing and firm s profitability. Reichheld and Sasser (1990) 20 have worked in the similar domain and developed understanding about increasing the Net Present Value (NPV) by retaining customers. In the research, it was found out that, among service and business to business sectors, rise of customer retention, even by 5% increases the NPV yield by 125% over customer s lifetime. A lot of researchers have worked in the field of customer retention and customer lifetime value. Rust et. al. (1995) 47 describe methods useful for evaluating the effect of quality of service and customer satisfaction on market share and customer retention. Clark and Payne (1994) 48 based on extensive literature survey on 20

15 customer retention proposed a three-step framework for customer retention management. The three sequential steps suggested by them are, identification of causes of defections, identification of key service issues and planning of corrective actions for improving retention. Payne and Rickard (1997) 49, based on their research work in the field of customer retention management, have developed mathematical models, which are helpful in decision making on the trade-off between allocating scarce marketing resources towards attracting new customers and towards retaining existing customers. Payne and Frow (1997) 50 used this mathematical framework for evaluating the marketing programs of a major UK electricity supplier for retaining the existing customers and acquisition of fresh customers. The concept of retention of current customers as more cost-effective than trying to acquire new customers is very popular in marketing community. Several researchers have argued that companies should focus on customer retention strategies as it costs five times more (many researches have argued ten times) for new client acquisition, as compared to retaining the current clients (Christopher, Payne and Ballantyne, 1991) 28. In the B2B context, the researchers suggest that, it is six times more difficult and expensive for new suppliers to find new buyers than it is for existing suppliers (Holmlund and Kock, 1995) 51. Customer value analysis based on Customer Lifetime Value concept emphasizes on marketing strategies for retaining existing customers. Customer value concept is also useful in the sense that, all customers are not equal for companies (Hallberg, 1995) 52. Commonly in businesses the client portfolio 21

16 varies from profitable clients, to break-even clients and non-profitable clients. Hence, only focusing on retaining current clients does not solve the purpose of increasing profitability. In the above mentioned case, it is not wise to retain the nonprofitable clients, as they do not add any value to the business. Understanding the CLV concept for profitability and profitable customers in various segments, will help the firms to focus on useful customers to increase value. The focus of this work is upon the understanding of profit capability of customers, in the form of net present value in terms of customers and the projected lifetime of such customers. This concept is based on two sub-concepts. First, that the company profitability varies for different customer segments, and the profitability pattern also varies with the life-cycle stage of the customers and several other factors. Second concept is the retention of most profitable customers for a longer period with the firm may increase the profitability manifolds. Many of such researches are also focused on suggesting various strategies on customer retention and increasing profitability from customers. Such works emphasize on the effect of companies internal service climate and its impact on overall customer satisfaction, which is instrumental in customer retention (Reichheld, 1996) 53. Customer Perceived Value (qtd. in Payne and Holt, 1999) 21 : Many researchers have focused on the importance of the voice of customer (Woodruff and Gardial, 1996) 54, but the main concept for doing this in the past was customer satisfaction measurement (CSM) (Woodruff, 1997) 1. It has been argued in such researches about organization s need to move beyond CSM, and understand more clearly that, which products and services are providing more value to the customers, which are in the 22

17 interest of organizations goals and objectives. The concept of customer perceived value has been focused by many present day researchers like (Gronroos, ; Hillier, ) etc. A comprehensive view has been given by Woodruff (1997) 1, and has defined this process through a model called, customer value hierarchy. This model associates the expected product/ service attributes and their performance with the expected outcomes in usage conditions, which finally relates to the aims and purpose of the customer. At the core of customer perceived value concept, there is the idea of tradeoff between perceived benefits and perceived sacrifices in the value exchange process. Perceived Sacrifice curtails all the concepts like purchase/ acquisition/ logistics/installation/repairs and service/ risks involved in product usage or malfunction. Perceived benefits includes functional attributes, service attributes, support and services available, relative price and quality. Using this concept of customer perceived value, the customer s value can be increased by decreasing the customer s perceived risk or sacrifices and increasing the customer s perceived benefits. Increasing the benefits can be in the form of adding some frill services to the core product, which is perceived by the customer as valuable or important or unique (Ravald and Gronroos, 1996) 57. The customer s perceived sacrifice can be reduced by reducing the customer s cost incurred in any discrete encounter, rather than the whole relationship with the customer. In the similar context, Gronroos (1997) 55, identified three types of customer cost, which need to be reduced, in order to reduce the customer s perceived sacrifice. These costs are, customer s direct cost (cost of entering into a relationship with a company, 23

18 customer s indirect cost (cost incurred due to unsatisfactory performance of the product) and customer s psychological costs (fear of customer about incurring cost due to spending more time in maintenance and repair of the product, and spending important/ productive time in that process). 2.2 THE S-D LOGIC The fundamental idea of S-D Logic concept was developed by Frederic Bastiat, who was an economic scholar (Lusch and Nambisan, 2012) 58. Service- Dominant (S-D) Logic is an approach for an integrated understanding of the purpose and nature of firms, customers and the markets. The foundational proposition of S-D logic is that the firms, customers, and markets are fundamentally concerned with exchange of services. S-D logic holds the notions of the value-in-use and co-creation of value as a key to superior competitive advantage, slightly more than the value-in exchange and embedded-value notions of Goods-Dominant logic. S-D logic considers the correlation among services and goods that is, a good is an application used in service provision. The service dominant logic of marketing (S-D logic) is a marketing paradigm development which shifts from the old paradigm to the firm-centric or good-centered view, to a new paradigm, the Consumer-centric or service-centered view (Vargo and Lusch, 2008) 59. The service-dominant logic (S-D logic) suggests that service is the fundamental basis of exchange and all social and economic actors are resource integrators that act together through shared service provision to co-create value (Vargo and Lusch, 2004) 60. Service-dominant logic (Vargo and Lusch 2008) 59 describes service as the significant purpose of exchange and provides understanding of how firms, customers, 24

19 and other market actors co-create value through their service interactions with each other. The service-dominant logic has advised that markets are places where firms arrange and integrate operant and operand resources to Co-create (Suvi Nenonen and Kaj Storbacka,2010) 61. Table 2.3: Conceptual Transitions: G-D Logic to S-D Logic (Source: Lusch and Vargo, 2006) 62 Goods Dominant Logic Concepts Transitional Concepts Service-Dominant Logic Concepts Goods Services Service Products Offerings Experiences Feature/ Attribute Benefit Solution Value Added Co-production Co-creation of value Profit Maximization Financial Engineering Financial Feedback/ Learning Price Value Delivery Value Proposition Equilibrium Systems Dynamic Systems Complex Adaptive Systems Supply Chain Value Chain Value-creation Network/ Constellation Promotion Integrated Marketing Communications Dialogue To Market Market To Market With Product Orientation Market Orientation Service Orientation The development of Service-Dominant Logic in marketing management (qtd. in Shaw, Bailey and Williams, 2011) 63 : According to Lusch et. al. (2007) 64, the customers should be viewed as operant resource, who are capable of working upon other resources, as a collaborative partner, the customers become active partners who co-create value with the firm. In such a scenario, the customers work as active 25

20 participants in organizational work. Auh et. al. (2007) 65 has explained this process of co-production to be a participative behavior of customer in a constructive manner in the creation and delivery of the service, which require cooperative, as well as constructive contribution from the firms. S-D Logic as a concept is seen as a contribution of three aspects. Firstly, S-D Logic is a newer concept of marketing which has altered the previous understanding about marketing. According Lusch and Vargo (2006) 62 and Lusch et. al. (2007) 64 in this new concept of marketing, a new dominant logic has emerged, under which three things are at center stage: Intangible nature of market offering Relationship between business and customer, and Exchange process So, according to Lusch et. al. (2007) 64, marketing is a continuous process which is essentially both social and economic in approach, which primarily focuses upon operant resources. Secondly, Lusch and Vargo (2006) 62 proposed nine foundational premises, which ideate competition through service. Such a perspective identifies key drivers of firms to develop competitive advantage. This develops the third aspect of S-D Logic, according to which the firms should manage its operant resources, which are its environment, its customers and its partners (Lusch et. al., ). Vargo and Lusch (2008) 59 further evolved their originally proposed nine foundational premises of Service-Dominant Logic and proposed ten foundational premises. 26

21 FPs Table 2.4: Service-dominant logic foundational premise (Source: Vargo & Lusch, 2008) 59 Original Foundational Premise FP1 The application of specialized skills and knowledge is the fundamental unit of exchange FP2 Indirect exchange masks the fundamental unit of exchange FP3 Goods are the distribution mechanism for service provision FP4 Knowledge is the fundamental source of competitive advantage FP5 All economies are service economies FP6 The customer is always a co-producer FP7 The enterprise can only make value propositions FP8 A service-centered view is customer oriented and relational FP9 Organizations exist to integrate and transform micro-specialized competencies into complex services that are determined in the market place FP10 Modified/ New Foundational Premise Service is the foundational basis of exchange Indirect exchange masks the fundamental unit of exchange Goods are the distribution mechanism for service provision Operant resources are the fundamental source of competitive advantage All economies are service economies The customer is always a co-creator of value The enterprise cannot deliver value, but only offer value propositions A service-centered view in inherently customer oriented and relational All social and economic actors are resource integrators Value is always uniquely and phenomenologically determined by the beneficiary Comment/ Explanation The application of operant resources (knowledge and skills), service, as defined in S-D Logic, is the basis of all exchange. Service is exchanged for service. Because service is provided through complex combination of goods, money and institutions, the service basis of exchange is not always apparent. Goods (both durable and nondurable) derive their value through use the service they provide. The comparative ability to cause desired change drives competition. Service (singular) is only now becoming more apparent with increased specialization and outsourcing. Implies value creation is interactional. Enterprises can offer their applied resources for value creation and collaboratively (interactively) create value following acceptance of value propositions, but cannot create and/ or deliver value independently. Because service is defined in terms of customer-determined benefit and co-created it is inherently customer oriented relational. Implies the context of value creation in networks of networks (resource integrators) Value is idiosyncratic, experiential, contextual, and meaning laden. 27

22 Difference between operant and operand resources (qtd. in Shaw, Bailey and Williams, 2011) 63 : In order to better understand the concept of value co-creation, it is important to understand clearly the difference between operant (S-D Logic based marketing) and operand resources (traditional marketing concept). In operand resource concept, the customers are seen as resources, which are used by the marketers to examine and promote the products and services. This is the traditional marketing approach, where customers are first identified into segments and marketing strategy is developed for particular selected segments. In the S-D Logic concept, the customers are the firm s operant resource, and as a resource they influence the service experience of their co-producers in the process. Co-production is considered as the new paradigm for competitive effectiveness by Bendapudi and Leone (2003) 67. The involvement of customers in the production process in the co-production can be a significant method of reducing the production costs. As an example to this concept, in travel business, the customers increasingly prefer to explore the internet for planning their travel and itinerary. This exploration of the internet before travel has become an essential part of the overall travel experience for the customers (Litvin et. al. 2008) 68. Similarly the air travel industry is also highly dependent on co-production concept where customers select and book air tickets online. They also do web-check in and settle their grievances and provide feedback through internet (Gross and Schroder, 2007) 69. The customer benefits in terms of reduced overall prices and increase in satisfaction levels. Adoption of co-production in the business model, in the same ways, as adopted by the tourism and airline industry as discussed above, requires a shift 28

23 towards customer-centric business model (Auh et. al., 2007) 65.The new business processes are developed with higher levels of customer involvement in consideration. This type of open-innovation is adopted by a large number of firms these days, and has become industry norms (Chesborough, 2006) 70. For example, Proctor and Gamble has mentioned in their mission statement, the the consumer is boss. This is a clear adoption of co-production philosophy by P&G, where customers are not only seen as a source of monetary value, but also, a good repository of new ideas (Lafley & Charan, 2008) 71. Lusch et. al. (2007) 64 and Etgar (2008) 72 have identified key factors which influence the customers to contribute in the co-production process. These influencers are summarized in a tabular format by Shaw, Bailey and Williams (2011) 63, as follows: Table 2.5: Key Factors Conditioning Customer Contributions to the Coproduction Process (Source: Shaw, Bailey and Williams, 2011) 63 Factors Expertise Control Consumer Capital Impact on Co-production Consumer s tendency of participation in co-production process depends upon capability (co-ordination of skills, competence and evolving experience). Also there is vital importance of computer based skills. More level of involvement when customer wants to exercise some control in the consumption/ buying process. Increased level of involvement if consumer has requisite economic and cultural capital. Experiential Benefits Gaining of experiential benefits by involving in new activities. Economic Benefits Time Perceived economic benefits play a key role in coproduction process. Consumers with more flexible time are more likely to engage in co-production. 29

24 Co-production model explained by Etgar (2008) 72 consists of 5 sequential steps. Stage One, It involves the creation of preliminary circumstances including suitable environment. Development processes for how the consumers will interact with the producers. Stage 2, involves development of consumer motivation, to encourage consumers to participate in the co-production process. The consumer motivators could be in the form of economic and socio-cultural drives and also motivation through risk reduction. Examples for such motivators in practice can be from the airline industry as discussed earlier, where the consumers prefer to make online booking for low-fare airlines. Also in the tourism industry, internet search, and preparation of itinerary based on suggestions and information available on various websites, has become a part of overall travel experience these days (Oorni, 2004) 73. Step 3, consists of calculation of cost-benefits from the co-production process. Step 4, includes the processes for activating consumers for full involvement in the coproduction process. In the last step 5, consists of getting outputs and the assessment of the experience and process of co-production activity. This work is very significant as it co-relates the co-production process with the S-D Logic fundamentals. The Experience Economy (qtd. in Shaw, Bailey and Williams, 2011) 63 : Even before the advent of S-D Logic concept, many researchers like Pine and Gilmore ( , ) have emphasized on advent of new experience economy, which is very different from previous concept of exchange of values. They furthered the concept of consumer experience and highlighted the importance of the involvement of both producers and consumers in co-producing memorable experiences associated with the consumption process. The important factors instrumental in creating memorable experiences include excellence in product design, consumer participation 30

25 in both active and passive mode, and the connection between consumer experience and consumption process. The product characteristics across various products and services, lead to variation in co-production process across various sectors (Etgar, 2008) 72. The main characteristics which vary are the features of various services that can be either physical or perceived. The key differentiator between various products is the customer perceived differences in product attributes between various categories. In terms of services, like tourism, such differences are very clear and apparent to the customers and they make informed decisions about participating in the coproduction process. But on the other hand, the producers need to be fully aware of the importance of co-production, especially for innovating new experiences. The form and nature of consumer experiences have drastically changed with the advent of World Wide Web, development of social networking sites, blogs, review sites, online communities, etc. In the context of tourism, Buhalis and Laws (2008) 77, have explained that, through the development of online platforms, it has become much easier for the customers to obtain information, grow new connections, share views on social networking sites like Facebook, Twitter, Blogs etc. (Wang and Fesenmaier, 2004) 78 and then make their travel decisions. Another advantage of online platforms is that it offers several new and innovative possibilities of creating co-production experiences on internet based virtual platforms. Therefore, many marketers are now emphasizing on the use of social media for getting crucial data regarding customer behavior and customer experiences. Many researchers have called this new era as conversation economy. 31

26 2.3 CO-CREATION OF VALUE Value Co-Creation is an emerging concept which holds the capability to create desirable competitive advantages for companies. Now, value creation does not happen only inside the firm but the contribution of consumers must be incorporated in all phases of the value chain. Thus collaborative consumers become a source of competitive advantage. This development was proposed in 2000 by Prahalad and Ramaswamy (2004) 79. So, the traditional consumer-producer relationship has changed. Still a majority of companies lack behind in this new development and fail to involve consumers and their innovative capacities. Even fewer examples are quotable in this context from Indian companies. Why is it that, the companies find it difficult to adapt themselves for effective co-creation? This research paper will try to develop deeper insights into the major challenges in the process of value co-creation, especially when it comes to the Indian consumers. Value co-creation can be defined as, Co-creation is an active, creative and social process, based on collaboration between producers and users that is initiated by the firm to generate value for customers. Co-creation can be seen in practice in two distinct approaches. First where, co-creation is used to boost regular businesses and the second, where co-creation is at the center of the business model. The concept of co-creation can be well understood by looking into some real world examples, where the firms have largely benefited from this concept. Gillete: The firm wanted to find out newer ways to make the shopping of beauty and grooming products among males to be more relevant and popular, especially for 32

27 those who were dissatisfied with their current retail experiences. So, instead of choosing a traditional market research approach, they adopted an interactive projective co-creation campaign and received around 100 ideas and insights. My Starbucks Idea (Share, Vote, Discuss, See): When Starbucks was going through tough times, with growing competition, and the firm losing its individuality, they started a co-creation campaign by the name, My Starbucks Idea, where customers exchange ideas among themselves and with Starbucks. Customers provide suggestions on various issues like, products, services, advertising, layout, location, CSR, in store music and so on. The campaign featured rewards for most active users and a good number of ideas received were implemented. More than 93,000 ideas were shared by around 1.3 million users. Dell Ideastorm: To come out of negative perception built in the customer community for their brand, Dell started Ideastorm campaign. When around 45% of posts regarding Dell were coming out to be negative, Dell created platforms like Studio Dell and Direct to Dell where the users were invited to share new ideas and issues openly and discuss them among themselves and with the employees. This helped Dell to turnaround their brand image by solving around 5,300 customer issues and around 3.5 million page visits per month. Value co-creation and S-D Logic are directly related to each other. Or, it can be said that, value co-creation has its origin in the S-D Logic. It is because, cocreation occurs during the exchange of service, which is the fundamental premise in S-D Logic, that is, service is the fundamental basis of exchange (Vargo and Lusch, 2008c 80, 2008a 81 ). The tangible goods are only the tools for availing the service. 33

28 Table 2.6: Comparison of goods-dominant (G-D) logic to service-dominant (S-D) logic (Source: Lusch et. al, ; Mc Carthy, ) Goods-Dominant (GD) Logic Tangible product services are considered as aid to the production of goods Products (units of output) = Operant resources (static, usually tangible resources) Customers as a target group 4Ps Products Promotion Price Place Competitive advantage is goods Value is added to the products in production process value delivery The external environments are considered as largely uncontrollable and forces to which firm needs to adapt Service-Dominant (SD) Logic Skills and knowledge Service (a process) = operant resources (dynamic resources as competences like skills and knowledge) Collaborating with customers and partners Customer = Partner who co-creates the value with the firm and promotes a market with philosophy Customer is treated as endogenous 3Cs Co-create service offering Co-create conversation and dialogue Co-create value proposition Competitive advantage is knowledge creation and application Value can be only determined by the user in the consumption process value creation The external environments are considered as resources the firm draws upon for support by overcoming resistances and proactively cocreates Service Experience Service experiences are the outcomes of the interactions between organizations, related systems/ processes, service employees and customers (Bitner et al ). Customer experiences are developed as the resultant of what is offered and how it is offered. Co-creation of service experiences was initially 34

29 proposed by C.K. Prahalad and Venkat Ramaswamy of University of Michigan Business School. The co-creation of experiences is the final outcome of any value co-creation process. This co-creation of experiences involve platforms such as the web site, personal networking devices, call center, a social interface, to put the consumers and communities and the firm to have transparent access and dialogue (DART Model of Prahalad and Ramaswamy, ). Co-Creation Concept Table 2.7: Migrating to co-creation experience (Source: Prahalad and Ramaswamy, 2004) 79 Concepts Traditional Exchange Co-creation Experiences Goal of Interaction Extraction of economic value Co-creation of value through compelling co-creation experiences, as well as extraction of economic value Locus of Interaction Once at the end of the value chain Repeatedly, anywhere, and any time in the system Company-customer relationship View of choice Pattern of Interaction between firm and customer Focus of quality Transaction based Variety of products and services, features and functionalities, product performance, and operating procedures Passive, firm-initiated, one-on-one Quality of Internal processes and what companies have on offer Set of interactions and transactions focused on a series of co-creation experiences Co-creation experience based on interactions across multiple channels, options, transactions, and the price-experience relationship Active, initiated by either firm or customer, one-on-one or one-tomany Quality of customer-company interactions and co-creation experiences 35

30 CO-CREATION: The Good Based upon various examples of co-creation discussed above, such as Gillete, My Starbucks Idea, Dell Ideastorm, and other popular examples, such as Nike Plus, BMW Co-creation Lab, Threadless.com and Lego Toys, three primary benefits can be charted out. These are: 1. Ideas for new product or service offerings 2. Enhancement of existing product and service offerings, and 3. Suggestion for improving business processes Apart from these direct benefits of co-creation, there are three indirect benefits which also accrue. These are: 1. Increased Customer Loyalty, by acquiring greater mind share of customers 2. Access to Customer Resources 3. Development of Competencies which cannot be easily acquired by the competition CO-CREATION: The Bad Case: SPAR Bag Design Contest SPAR is the biggest food retailer of Ireland, with over 450 high quality outlets across the country. The retailer launched a re-usable bag design contest in Ireland. The objectives were to create a reusable bag which can be used in place of the existing Spar bag. The design was supposed to be appealing and the main focus was on facilitating customers to delegate work in teams and effectively communicate with each other. The idea was to take an existing idea, developing it further and to re-use it. The contest ran from 8 th June to 27 th July, Around 5,300 bag designs were 36