SL Vargo, RF Lusch – Recent developments of Service-Dominant Logic (readings)

Foundations of Service-Dominant Logic

Service Ecosystems

Innovation, Institutionalization, and Technology

Value Co-creation

Experience and Engagement

Stephen P Osborne – The New Public Governance (readings)

Collaboration: co-production and the co-creation of value

Derivative Proposition 3

The continued ascendance of information technology with associated decrease in communication and computation costs, provides firms opportunities for increased competitive advantage through innovative collaboration.

The concept that the customer is always a collaborator is both a foundational premise (FP6) of S-D logic and a popular focus in the contemporary marketing literature (e.g., Bendapudi and Leone 2003; Prahalad and Ramaswamy 2004). However, it is often not recognized that there are two components of collaboration. The most encompassing of these components is the co-creation of value. The concept of co-creation of value represents a rather drastic departure from G-D logic, which views value as something that is added to products in the production process. S-D logic, however, argues that value can only be determined by the user in the “consumption” process. Thus, it occurs at the intersection of the offerer, the customer – either in direct interaction or mediated by a good as indicated in FP3 – and other value-creation partners. Therefore, the idea of co-creation of value is closely tied to “value-in-use” and is inherently relational. It is also highly related to the concept of customer experience (Pine and Gilmore 1999; Smith and Wheeler 2002) and also incorporated as a key element of perceived value in Parasuraman and Grewal’s (2000) model of the quality–value–loyalty chain.

The second component of co-production involves the participation in the creation of the core offering itself, and therefore, probably more appropriately (than value-co-creation) referred to as “co-production.” It can occur through shared inventiveness, co-design, or shared production and can occur with customers and any other partners in the value network. Common examples can be a person assembling Ikea furniture, a person advising their hairstylists during the hair styling process, and a retailer and a manufacturer co-producing a retail marketing program. Co-production, like co-creation, is also related to the emerging concept of customer experience.

Because both the “co-creation of value” and “coproduction” treat the consumer as endogenous, they are different from the production concepts associated with G-D logic. Clearly, they are also nested concepts with the former superordinate to the latter in the same way, and with similar implications, as the relationship between service and goods in S-D logic. Traditionally, most marketers and consumer researchers have focused upon buyer behavior related to the product and the transaction, and thus focused on only a subset of co-production (for a good review of relevant literature on customer participation see Bendapudi and Leone 2003). However, if, as S-D logic suggests, value is co-created, it is necessary to shift the focus to relationship formation and consumption behavior. It also implies that co-creation and co-production occur not only between the firm and the customer but also involves other parties (value-network partners), and implies that resource integration is a primary function of the firm (Vargo and Lusch 2006).

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Co-creation of value

Derivative Proposition 4

 Firms gain competitive advantage by engaging customers and value network partners in co-creation and co-production activities.

One opportunity for organizations to compete through service is to identify innovative ways of co-creating value. Interactivity and doing things with the customer versus doing things to the customer is a hallmark of S-D logic. Goods may be instrumental in relationships, but they are not parties to the relationship; inanimate items of exchange cannot have relationships (Vargo and Lusch 2004). Consequently, S-D logic places a high priority on understanding customer experiences over time.

As parties specialize, they need to rely increasingly upon other entities for value co-creation—that is, they draw increasingly upon and are dependent on the resources of others. Some of these other resources are private and some public. For example, if one purchases an automobile but also  has access to well-built highways, public parks, enforced traffic laws, and so forth, then, over time, one obtains a different service experience than if these public resources were not present. Similarly, if one purchases an automobile and has access to a garage to keep the auto clean and in good condition the experience of using the auto is again altered. In short, the resources that are endogenous to value creation often include those traditionally categorized as belonging to the uncontrollable, “external” environment. This also suggests that the customer is a primary integrator of resources in the creation of value through service experiences that are interwoven with life experiences to enhance quality of life.

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Co-production, co-creation, and pricing

Derivative Proposition 6

Providing service co-production opportunities and resources consistent with the customer’s desired level of involvement leads to improved competitive advantage through enhanced customer experience.

Only casual observation of the American retail landscape is needed to see the pervasive presence of price competition, especially with the lowering of search costs via the Internet (Alba et al. 1997; Bakos 1997; Gourville and Moon 2004; Lynch and Ariely 2000). Does S-D logic provide any insights for retailers and others on howto more effectively compete on the price dimension? This is important because only through lower costs or enhanced revenues can a firm improve its financial performance. We know analytically that price per unit multiplied by units sold equal revenue. One could argue that if superior service strategies are to yield improved financial returns, then customers should be willing to pay a higher price per unit of service or to purchase more service. While logically correct, this does not inform the marketer about how to achieve better financial returns through superior service strategies. Importantly, S-D logic provides the conceptual tools that can offer insight into the “how” issue.

While it is generally understood that organizations should proactively link co-production and pricing strategies, S-D logic implies extending this price co-production (Lusch and Vargo 2006) link to the firm’s value proposition. A value proposition can be thought of as a promise the seller makes that value-in-exchange will be linked to value-in-use. When a customer exchanges money with a seller s/he is implicitly assuming the value-in-exchange will at least result in value-in-use that meets or exceeds the value-in-exchange. A co-produced value proposition can make the price contingent upon the quality of service experience or other agreed upon output. Sawhney (2006) refers to this as gain sharing or risk and reward sharing. Here the value in exchange (price) is tied to the value realized by the customer. Consequently, gainsharing or risk-based pricing could be a part of developing a service strategy that links financial returns to superior service. If both buyer and seller have something at risk and something to gain, then collaboration will be much more fruitful.

Can a retailer use gain-sharing or risk-based pricing? We argue affirmatively. Consider an example of a retail buyer collaborating with a vendor on a merchandising program. The program might involve a set of integrated services that are tied to value-network management processes – for example, customer relationship management, customer service management, demand management, order fulfillment, manufacturing flow management, supplier relationship management, product development, and returns management (Lambert and Garcia-Dastugue 2006) – involving the retailer, its vendors, and other value-network partners. Adopting “gain sharing or risk-based” pricing, the retailer would pay a price on the basis of the quality and level of service provided and sales revenue achieved. However, for this approach to be successful, the retail buyer and the vendor (and perhaps other value-network partners) should co-create the value proposition. This co-created value proposition would increase the chances of a win–win situation in a field where intense negotiations have left many vendors feeling underappreciated.

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