Service-Dominant Logic: A Framework for Managing Co-Creation of Value

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1 Service-Dominant Logic: A Framework for Managing Co-Creation of Value 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 valuecreation 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)

2 2 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 fieldbased research with managers highlighted the need for a process-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 Customer Processes Customer Learning and Relationship Strength Total RelationshipExperience Thinking Cognition Feeling Emotion Doing Behaviour Supplier Processes Relationship Processes Co-creation Option Implementation Planning Management Opportunities & Metrics Co-creation Relationship & Relationship Experience Experience Design Design Organizational Learning and Knowledge Management 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.

3 3 The Supplier s Value-Creating Process Co-creation opportunities, planning, implementation and metrics: From the perspective of the supplier, creating value for the customer commences with 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).

4 4 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 Supplier processes Encounters Customer processes Goals in life Relaxation Experiencing new Holiday plans Keeping up friendships Social intercourse Developing hobbies Keeping up language skills Advertisement Direct mail (letter) Contact request Support of guidelines Supporting the mission of customers that want to travel Improving brand recognition Attractive marketing commincation 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 Discussing plans Budget proposal Brochure Direct mail (letter) Good to knowdocument Who are weadvertisement Planning support Planning budget Own contact person at travel agency Travel consulting Updating customer information Sending offering Sending Good-toknow material Checking customer s timetable 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 Brochure Sales call (phone or meeting) Application forms Support of decision making Consultative sales Information support Idea generation Preparations Paying Insurance & vaccinations Currency, passport, visa Luggage acquisition Preparations for journey Packing Buying film Gathering info Getting babysitter Billing Ticket Good-to-know document Discussions about arrangements Insurance We re-on-holiday postcard Preparation support Taking care of travel documents Exchanging currency Booking tickets Insurance informing Insurance acquisition Sending Good-toknow material Sending checklist Journey Waking up & Airport Finding the hotel Accommodating Buying a map Buying tax-free Destination services Participating in trips on site Send postcards Check list for those at home Check calls Escort/guides Map Good-to-know document Implementation support Informing, sending material Copying maps Giving contact information Organizing airport Follow-up Giving feedback Laundry, unpacking Giving souvenirs Groceries Informing relatives Personal follow-up (solarium, sickness) Currency exchange Taking care of mail and bills Feedback form Feedback discussions Welcome home letter/package Offering Credit note / additional bill Home Follow up support Welcome homeletter Airport Contacting Taking care of feedback Billing / crediting 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).

5 5 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 cocreation. 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 cocreation. 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.

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