Title of paper: Value co-creation in b-to-b-services. Authors: Krista Keränen, Katri Ojasalo. Theme: 3. Co-creation

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1 Title of paper: Value co-creation in b-to-b-services Authors: Krista Keränen, Katri Ojasalo Theme: 3. Co-creation Keywords: Co-creation, B-to-b-services, Service logic ABSTRACT Companies are moving from transaction-based business models where value came from physical goods to models where value comes from service business and longlasting customer relationships. The new business models require commitment to collaborative processes and co-creation of value with customers. This conceptual paper describes an ongoing research project aiming to develop tools and methods for enhancing value co-creation in b-to-b-services. Since the research project is in its initial phase, the main purpose of the paper is to analyse knowledge gabs in the literature on this field of study. After the introduction section, this paper views how service research has developed over the years, and two broad knowledge gaps are identified. Then the paper discusses the service logic and co-creation. After introducing the theories and knowledge gaps, the paper shows how this ongoing research is planned to be carried out. Finally, the conclusions are drawn. FULL PAPER Introduction Adding value through comprehensive customer solutions and getting new or changed services into market has become an important competitive advantage for companies. Customers are looking for service value, total solutions and compelling experiences. Since all businesses are more or less service businesses, the servicedominant logic (see e.g. Vargo & Lusch 2004) or briefly service logic is replacing the traditional product business approach. In the service logic, the focus is on creating comprehensive customer solutions that may consist of various interrelated tangible and intangible elements producing value for both the service provider and the customer. Most importantly, the service logic aims to support the customer's value creation processes and to co-create value with customers (see Vargo & Lusch 2008).

2 As more and more companies internalize the significance of the service logic approach, the more and more important it is to understand the customer organisation's value creation processes and to be able to design new kind of comprehensive service solutions together with customers. This is particularly true in business-to-business companies, i.e. in companies whose customers are other organizations (see Ojasalo & Ojasalo 2010). For example, the majority of professional services represent the b-to-b market. The importance of these types of services, called KIBS (Knowledge Intensive Business Services), is still growing. The ICT sector is one of the biggest industries in b-to-b services. B-to-b services are often complex entities. Service logic is particularly challenging for companies who have worked in a product-oriented approach (goods-dominant logic/industrial logic), highlighting their own products or services, processes and technologies. Especially in b-to-b businesses, it is crucial to deeply know customers, their business models and processes, and on this basis to develop new ways to create value with customers and other stakeholders (Ojasalo & Ojasalo 2010). Service practitioners (industry) and service research (academia) require new concepts, new approaches, and new methods that recognize the interdependencies between the customer and the service organisation. Especially new innovative tools are needed in the business-to-business context (e.g. Ostrom et al. 2010). This conceptual paper describes an ongoing research project aiming to increase understanding and develop tools and methods of value co-creation in b-to-b-services. Since the research project is in its initial phase, the main purpose of the paper is to analyse knowledge gabs in literature dealing with value co-creation in b-to-b-services. First, this paper views how service research has developed over the years, and two broad knowledge gaps are identified. Then the paper discusses the service logic and co-creation. After introducing the theories and knowledge gaps, the paper shows how this ongoing research is planned to be carried out. Finally, the conclusions are drawn. Service research as a multidisciplinary field of study Service research is a distinctly multidisciplinary field. To identify knowledge gaps in research, the evolution of service research is next briefly described. The evolution of multidisciplinary service research can be characterized in six periods (based on Fisk et al and Succeeding through Service Innovation 2008). The first period from 1950 until 1980 is called Crawling out period. At this initial phase service marketing and service operations became distinct from goods marketing and operations. Much of the research and discussion focused on the question how services differ from goods. The classic distinctions between services and goods were intangibility, heterogeneity, inseparability (simultaneous production and consumption), customer participation and perishability (e.g. Shostack 1977). The second period from 1980 until 1985 is called Scurrying about period (Fisk et al. 1993). A core group of service academics and business practitioners was developed (e.g. Grönroos & Gummesson 1985; Lovelock 1984; Langeard et al. 1986; Shostack 1981). Services research moved beyond goods and products still being mostly conceptual. The literature highlighted, for example, needs to manage the personnel and customers who are involved in the service experience, the physical aspects of the service and the process by witch the service is delivered (e.g. Booms & Bitner 1981).

3 The third period between is called Walking erect period (Fisk et al. 1993). Several models describing the process of new service development emerged (e.g. Donnelly et al. 1985; Scheuing and Johnson 1989; Bowers 1989). Other emerging topics included for example issues such as service quality (see e.g. Grönroos 1983; Parasuraman et al 1985), the design and management of service production and encounters (Czepiel et al 1985; Eiglier and Langeard 1987), and the role of customers, intangibles, and the physical environment in the customer s evaluation of the services (e.g. Larsson and Bowen 1989; Hui and Bateson 1991). The fourth period from 1993 until 2000 is called Making tools period (Succeeding through Service Innovation 2008). Then service research was broadened, deepened and sharpened and it was more quantitative including measurement, statistics and decision support modelling. There were more multidisciplinary research and expanded topic areas included service productivity (Ojasalo 1999), service experiences, service quality and customer satisfaction, connecting operational factors that affect quality to customer loyalty and service orientation, service supply chains, service recovery, technology infusion and service computing, etc. (Succeeding through Service Innovation 2008). The fifth period after 2000 until now is called Creating language period (Succeeding through Service Innovation 2008). New models of service are emerging and the concept of a service system is beginning to take hold to unite the many perspectives. The field is expanding rapidly with an expansion of literature worldwide. Many publications that focus on service design from the designers point of view have emerged (e.g. Nettelbladt & Renström 2003; Mager 2004; Moritz 2005; Miettinen 2007). Service Science, Management and Engineering (SSME) initiative is aiming to strengthen industry-academic-government interactions (see Hefley & Murphy, eds. 2008). Service science applies scientific understanding to advance the ability to design, improve, and scale service systems for business and societal purposes (Maglio & Spohrer 2008). The service-dominant logic view (e.g. Vargo & Lusch 2004 and 2008; Gummesson 2008) or service logic (Grönroos 2008 and 2011) is gradually replacing the traditional view of goods-versus-services, with a view of service as value-creating support to another party s practice (Grönroos 2011). Servicedominant logic or service logic will continue to be a catalyst for important research in the future, and more research is needed on co-creation which is the central phenomenon in the service-dominant logic (Ostrom et al. 2010). In other words, there is an obvious knowledge gap related to value co-creation (see also Grönroos 2011) which is the key issue in this ongoing research project. The service logic and co-creation will be viewed in more detail in the next sections. The origins of service research have been in conventional service businesses and especially in customer services. In the 2000s, much service research has been carried out in manufacturing companies that have been moving towards a service-oriented approach and comprehensive customer solutions (see Ojasalo & Ojasalo 2008). However, there is an evident need for additional research on business-to-business services, i.e. viewing various service research topics from a business-to-business lens (Ostrom et al. 2010). This is an important knowledge gab on which this ongoing reseach project will focus, i.e. co-creation will be studied from the business-tobusiness point of view.

4 Moving towards service logic and value co-creation According to the conventional thinking about value creation, every company occupies a position on a value chain. In a value chain, a company adds value to inputs and then passes the output to its customer who is the next actor in the chain (Porter 1985; Normann & Ramirez 1993). Customers are outside of the supplier company, and value creation occurs inside the supplier company through its own activities. In other words, suppliers have traditionally been able to act autonomously with no or little interference from their customers (Prahalad & Ramaswamy 2004c), and valueadded has been able to be equalized with the cost incurred by the supplier (Gummesson 2008). According to the traditional approach, value is embedded in the units of output (value-in-exchange), and the outputs present the fundamental units of exchange (e.g. Vargo & Lusch 2006). The locus of interaction is at the end of the value chain, and the value chain stops when the end-customer has bought a product (Prahalad & Ramaswamy 2004c). Table 1 Comparison of goods-dominant (G-D) logic to service-dominant (S-D) logic (Lusch et al. 2006; Mc Carthy 1960.) Goods-dominant (G-D) logic Tangible product services are considered as aid to the production of goods Service-dominant (S-D) logic Skills and knowledge Products (units of outputs)= operand resources (static, usually tangible, resources that must be acted upon to be useful) Customers as a target group FP s Products Promotion Price Place Competitive advantage are goods Value is added to the products in the production process value delivery The external environments are considered as largely uncontrollable and forces to which firm needs to adapt Service (a process)= operant resources (dynamic resources such competences as skills and knowledge that capable of acting and producing effects in resources for the benefit of another party) Collaborating with customers & partners Customer is an operant resource, a partner who co-creates the value with the firm and promotes a market with philosophy Customer is treated as endogenous FP S Co-create service offering Co-create conversation & dialogue Co-create value proposition Co-create value network & processes Competitive advantage is knowledge creation & 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 co-creates the environments In the 2000s, the service logic has become the key business logic replacing the above described traditional product business approach (goods-dominant logic or industrial logic). In fact, Service-dominant (S-D) logic approach introduced by Vargo & Lusch (2004) has turned the understanding of business thinking upside down. S-D logic (see Table 1) is philosophically grounded in a commitment to collaborative processes with customers, partners, and employees. It challenges management at all levels to be of service to all the stakeholders and recognizes the company and its exchange partners who are engaged in the co-creation of value through reciprocal service provision (Vargo & Lusch 2008). Customers are not considered to be the subject of marketing, but as active and creative resources and partners. Consequently, the role

5 of the service company has shifted from being a producer of value to a supporter of value since customers are in charge of their value creation (Grönroos 2008 and 2011). According to Vargo & Lusch (2006, 44), There is no value until an offering is used experience and perception are essential to value determination. Thus, there is an apparent shift away from the traditional product business approach that sees value embedded in products and services (value-in-exchange) to a new approach where value is embedded in personalized experiences (value-in-use) (e.g. Prahalad and Ramaswamy 2004a). Informed, networked and active customers ar creating value with service providers, and the interaction between the customer and the provider is becoming the locus of value creation (Prahalad and Ramaswamy 2004b). When value is co-created, the supplier contribution is a value proposition that can support customer s value creation processes, and the customer contribution is the value actualization (Gummesson 2008). In value co-creation, business strategy starts by understanding the customer s value creating processes and selecting which of these processes the supplier wishes to support. The customer s value creation process can be defined as a series of activities performed by the customer to achieve a particular goal (Payne et al. 2008). The positioning within the customer s processes defines the support and thus the scope of the value proposition. In other words, planning for co-creation is outside-in as it starts from an understanding of the customer s value-creating processes, and aims at providing support for better co-creation of value (Payne et al. 2008). However, co-creation is not about the provider company to trying please the customer or pampering the customer with lavish customer service. It does not mean that the customer is king and always right (Prahalad & Ramaswamy 2004b). Co-creation focuses on customer-company interaction as the locus of value creation. During interactions a company gets an opportunity to engage itself with its customers value creation and become a co-creator of value (Grönroos 2011). There can be multiple points of interaction anywhere in the system and all the points of customer-company interaction are critical for value creation. All points of interaction between the provider and the customer are opportunities for value creation (Prahalad & Ramaswamy 2004b). Customers alter their roles, improve their capabilities, and contribute their own resources to the value creating process. Therefore, improving the integration of a customer s knowledge resources into value creation requires that the service provider increases its own capabilities, those of its suppliers, and those of its customers (Michel et al. 2008). According to Ojasalo (2010) there are three different types of business approaches based on how the customer s role is understood: traditional product business approach, co-production in services and value co-creation approach (see Table 2).Traditional product business approach treads customers as passive audience, and the value of the offering is created by the company. Customers are buying the products in which value is already embedded (value-in-exchange). In many cases customers ideas and their feedback are collected by using systematic and structured methods (Ojasalo 2010). Focus of quality is on internal processes and on product features and functionalities (e.g. Prahalad & Ramaswamy 2004c). In value co-creation approach, on the contrary, value is defined by the customer. Customer experiences and perceptions are essential to value determination, and value is created in the comsumption/usage stage (value-in-use). The company-

6 customer relationship is a set of interactions focused on a series of co-creation experiences, and building relationships drives financial value. Value co-creation may results in unique value often started with spontaneous idea achieved through dialogical interaction. Value is co-created in learning together, and dialog operates as an active interactive process of learning (e.g. Ballantyne & Varey 2008). Customers are in a proactive role and involved at every stage of service development. An active dialog improves indentifying customers latent needs and wants. Customers may also be directly involved to specifically develop new value propositions, i.e. co-design is one form of co-creation (see Flint & Mentzer 2006). In co-creation, new levels of access and transparency are needed. Focus of quality is on customer-company interactions and co-creation experiences (e.g. Prahalad & Ramaswamy 2004c). The concept of co-production can be placed between these two approaches. Coproduction seems to be a big step from the traditional product business approach towards value co-creation. In services, value is not embedded only in the output (as the traditional approach assumes) but also in the production process due to the inseparability of production and consumption in services (e.g. Ojasalo 1999). However, the concept of co-production does not yet reach the same degree of customer involvement and joint processes which are the typical features of cocreation. In co-production, customers are active players but the parameters of coproduction are defined by the service provider. Customers are managed, and they are educated for their preplanned roles (e.g. Zeithaml et al. 2006). Their access to information, people and other resources of the service provider is planned and carefully controlled. They are not directly involved in developing and modifying services with service providers. In other words, co-production excludes co-design. Customer feedback on service quality dimensions affects service development. The customer is usually in the reactive role of responding to questions being posed by the service provider (Ojasalo 2010).

7 Table 2. Framework of co-production and value co-creation (Ojasalo 2010, 175) TRADITIONAL PRODUCT BUSINESS APPROACH Customers are passive audience ; value is created inside the company with no interference from the customers Delivering value means selling to customers; value is embedded in the product (value-in-exchange) Company-customer relationship is transaction based Transactions are the ultimate drivers of financial value Products (output) safisfy customer needs Systematic, structured methods are used to collect information on customer needs Value is promised by selling the benefits Interaction only once at the moment of exchange Focus of quality is on internal processes and on product features and functionalities making and selling VALUE CO-CREATION APPROACH Value is defined by the customer; customer experiences and perceptions are essential to value determination; value is created in the comsumption/usage stage (value-in-use) Company-customer relationship is a set of interactions focused on a series of co-creation experiences Building relationships drives financial value Solutions satisfy customer needs CO-PRODUCTION IN SERVICES Customers are active players ; Business strategy starts by understanding customers value creating processes and the points where company s value proposition can support customer s value creation as partial employees they participate in the service production within parameters defined by the service provider Service process and the outcome of the process satisfy customer needs Strategies focus on participating within one part of the value chain. Value is co-produced by making and keeping promises Managing, educating and rewarding customers are needed to enhance customer participation Customers access to information, people and other resources of the service provider is planned and carefully controlled Customer feedback on service quality dimensions affects service development servicing Strategies focus on building or tapping into value networks Value is co-created in learning together; dialog operates as an interactive process of learning Results in unique value often started with spontaneous idea achieved through dialogical interaction Active interaction: repeatedly, anywhere, and any time in the system, initiated either by the customer or the company New levels of access and transparency are needed Customers are involved at every stage of service development in two ways: 1) Active dialog improves indentifying customers latent needs and wants (proactive approach), 2) Customers may also be directly involved in co-design Focus of quality is on customer-company interactions and co-creation experiences listening, learning together

8 Increasing the understanding and developing tools for co-creation Based on literature, there seem to be an evident need for increasing the understanding on the co-creation phenomenon in the b-to-b-context. Obviously, there is also a need for new models and tools in this field. To address this knowledge gab, the main purpose of the ongoing research project is to increase knowledge of co-creation in b-to-b-services. The objectives of the ongoing research project are: 1. To identify co-production and/or co-creation activities and roles in b-to-bservice business relationships. 2. To develop models and tools for effective and efficient value co-creation in b-tob-services. Four case companies are involved in the research project. They all offer b-to-bservices and represent different industries: trade, KIBS, ICT, and construction industry. The research strategy will be action research. In action research new theory and knowledge are created together with all actors during the series of actions (Gummesson 2000; Babour2008; Gill & Johnson 2010). Action research is in line with the core of the co-creation phenomenon in which dialog operates as an interactive process of learning (see Ojasalo 2010). In the first phase of the empirical research, the current state of business approach and service thinking is analyzed in the four case companies. This is accomplished by semi-structured interviews and guided focus group discussions. First, companies key personnel and some business customers are interviewed. After individual interviews, a focus group discussion will be carried out in each case company. The current state analysis is a crucial part of this research project since it builds up a pre-understanding needed in the research (c.f. Gummesson 2000). This first phase starts the first spiral in the action research (Gummesson 2000; Babour2008; Gill & Johnson 2010). The second phase of research will focus on the co-creation development needs identified in the case companies in the current state analysis. This development process will last fourteen months and it will have several typical action research spirals in which all project actors will be building, testing, and evaluating cocreation models and tools together (Gummesson 2000; Babour2008; Gill & Johnson 2010). In this phase, collaborative service design methods will be used to involve customers in the business development. Conclusions Major changes in the business environment and existing research knowledge challenge companies to deeply understand how they can engage themselves with their customers value creation and become value creators (see Grönroos 2011). However, there is an evident knowledge gap and lack of models and tools related to

9 value co-creation in b-to-b services. This conceptual paper described an ongoing research project aiming to develop tools and methods for enhancing value cocreation in b-to-b-services. Since the research project is in its initial phase, the main purpose of the paper was to analyse knowledge gabs in the literature on this field of study. After the introduction section, this paper viewed how service research has developed over the years, and two broad knowledge gaps were identified: (1) there is an evident need for more research on the co-creation phenomenon and (2) service research should be also viewed from the b-to-b services lens, not only from the customer service lens. The paper discussed the service logic and co-creation theories, and then it showed how this ongoing research is planned to be carried out. The research project applies action research as the research strategy, and it involves four case companies actively participating in developing their co-creation approach. The research project aims to identify co-production and/or co-creation activities and roles in b-to-b-service business relationships, and to develop models and tools for effective and efficient value co-creation in b-to-b-services. References Ballantyne, D., & Varey, R.J. (2008). Service-dominant logic and the future of marketing, Journal of the Academy of Marketing Science, 36, Barbour, R.R. (2008). Introducing Qualitative Research: A student Guide to the Craft of Doing Qualitative Research. London: Sage Publications. Booms B. H., & Bitner M. J. (1981). Marketing Strategies and Organizational Structures for Service Firms, in Donnelly & George (eds.), Marketing of Services, AMA, Chigaco, Bowers M. R. (1986). New Service Product Development in Service Industries. PhD Dissertation, Texas A & M University, College Station. Czepiel, J.A., Solomon, M.R, & Suprenant, C.F., (Eds.) (1985). The Service Encounter: Managing Employee/Customer Interaction in Service Businesses. Lexington: Lexington Books. Donnelly J. H. Jr., Berry L. L., & Thompson T. W. (1985). Marketing Financial Services. Dow Jones-Irwin. Eiglier, P., & Langeard, E. (1987). Servuction. Paris: McGraw-Hill. Fisk R. P., Brown S. W., & Bitner M. J. (1993). Tracking the Evolution of the Services Marketing Literature, Journal of Retailing, Vol. 69, No. 1, Flint, D.J., & Mentzer, J.T. (2006). Striving for Integrated Value Chain Management Given a Service-Dominant Logic for Marketing, in in Lusch & Vargo (eds.), The Service-Dominant Logic of Marketing, M.E. Sharpe, Inc.

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12 Prahalad, C.K., & Ramaswamy, V. (2004c). Co-creating unique value with customers, Strategy and leadership, 32, 3, 4-9. Porter, M. E. (1985). Competitive Advantage, New York, Free. Scheuing E. E., & Johnson E. M. (1989). A Proposed Model for New Service Development, The Journal of Services Marketing, Vol. 3 No. 2, pp Shostack, G.L. (1977). Breaking Free from Product Marketing, Journal of Marketing, Vol. 41, April, Shostack, G.L. (1981). How to Design a Service, European Journal of Marketing, Vol. 16, No. 1, Succeeding through service innovation: A service perspective for education, research, business and government (2008). University of Cambridge Institute for Manufacturing (IfM) and International Business Machines Corporation (IBM), April Vargo, S. L., & Lusch, R.F. (2004). Envolving to a New Dominant Logic for Marketing. Journal of Marketing, 68 January, Vargo, S. L., & Lusch, R. F. (2006). Service-dominant logic: What it is, What it is not, What it might be, in Lusch & Vargo (eds.), The Service-Dominant Logic of Marketing, M.E. Sharpe, Inc. Vargo S.L., & Lusch R.F. (2008). Service-dominant logic: continuing the evolution, Journal of the Academy of Marketing Science, Vol. 36 No 1, pp Zeithaml, V. A., Bitner, M. J., & Gremler, D. D. (2006). Services Marketing Integrating Customer Focus Across the Firm. McGraw-Hill, 4 th edition. Biography of authors Krista Keränen holds a Master s degree in hospitality management. She is currently doing her Ph.D. at Cambridge University, UK. She has a long background in service business and entrepreneurship. She has been acting as a development manager at Laurea University of Applied Sciences, Leppävaara Unit since Katri Ojasalo, Ph.D. (Business Administration), is a principal lecturer and head of Master s degree program in Service Innovation and Design at Laurea University of Applied Sciences in Espoo, Finland. Her doctoral thesis dealt with productivity of services (Ojasalo 1999). She has earlier been Professor of Marketing (act.) at Tampere University, and researcher at Swedish School of Economics and Business Administration Helsinki.