Co-Creation of Value

In the scientific literature, the first concept of co-creation emerged in the late 1990s. Kambil, Friesen and Sundaram (1999) defined co-creation as engaging customers directly in the production or distribution of value. Customers can get involved at any stage of the value chain and thus become partial “employees” of a firm. According to Kambil et al., (1999) customer value is realized when a firm’s offering matches the specific customer needs at a cost that he/she considers reasonable. Therefore, “the greater the fit, the greater the customer value created”

(Kambill et al., 1999, 40).

C.K. Prahalad and Venkat Ramaswamy adopted the term “co-creation” in 2000 in their Harvard Business review article “Co-Opting Customer Competence” to refer activities that customers and companies practice jointly to create value. Further, in 2004 they redefined the original wording into “value co-creation” to describe the phenomena more extensively. According to Prahalad and Ramaswamy (2004), co-creation experience is the basis of value and it derives from an individual’s personalized co-creation experience with a focal firm.

Companies can differentiate themselves not just through cost or quality of their products or services, but also through their ability to co-create unique experiences (Prahalad & Ramaswamy, 2003). This argues against the product/service customization and “customers as innovators” concepts since it involves more than a company’s predetermined plate of offerings to customers.

Depending on how an individual decides to interact with the experience environment that a company facilities, affects his/her experience outcome.

Vargo and Lusch took the discussion further and introduced the service-dominant logic (Vargo & Lusch, 2004, 2008; Lusch & Vargo, 2006), a view that implies that services instead of goods are the primary unit of exchange and that the customer is always a co-creator of value. The traditional or goods-dominant logic (G-D logic) focuses on tangible resources, embedded value and static transactions whereas the service-dominant logic (S-D logic) argues that specialized skills and knowledge as the key to obtaining competitive advantage (Vargo & Lusch, 2004). In S-D logic, the role of companies is to facilitate the co-creation process, develop their core competencies and positioning them as value propositions instead of merely producing standardized offerings without little or any participation from consumers (Vargo & Lusch, 2004, 2008; Lusch & Vargo, 2006). Central idea to the S-D logic is that “innovation is not defined by what firms produce as output but how firms can better serve” (Vargo & Lusch, 2004, 5). The differences between the G-D logic and the S-D logic are illustrated in a below figure.

FIGURE 5. Goods-Dominant Logic vs. Service-Dominant Logic

G-­‐‑D  logic

Grönroos (2008, 2011; Grönroos & Voima, 2013) questions the roles of both service providers and customers in value-in-use and provides new perspectives into previous theories of value co-creation. According to Grönroos (2008) firms provide resources for consumption thus they could be viewed as creators of value foundation. However, consumers always bring other resources to the table and form the second layer of the value foundation. When resources are used by consumers in the self-service process, they add the knowledge held by them and further these combined resources evolve into value-in-use. Thus, customers create value for themselves. Grönroos (2008) argues that whether customers are not skillful enough to make use of the resources provided by a firm, value-in-use is non-existent. To become join creators of value, direct interactions between a firm and customer need to exist since a firm itself cannot deliver value (Grönroos, 2011; Grönroos & Voima, 2013). If no interaction occurs, a firm is only acting as a facilitator of value whereas a customer is engaging in the process independently using the resources provided by a firm (Grönroos, 2011). Instead of delivering value, a firm can only offer value propositions, hence value co-creation is restricted to a joint value sphere of direct interaction between a service provider and a customer (Grönroos & Voima, 2013). A firm needs to find access to this joint sphere in order to engage into the value-creating process with a customer (Grönroos & Voima, 2013). Differences between value creation spheres is demonstrated below in more detail.

FIGURE 6. Value Creation Spheres (Grönroos & Voima, 2013)

Academic literature offers several definitions for co-creation. According to Zwass (2010) co-creation is “participation of consumers along with producers in the creation of value in the marketplace“ (Zwass, 2010, 13). The process may be initiated by a firm or by consumers themselves and is jointly actualized with an aim to satisfy cost-effectively the needs and wants of specific individuals (Zwass, 2010). Piller, Ihl and Vossen (2010) consider customer co-creation as “an active, creative and social collaboration process between producers (retailers) and customers (users) facilitated by the company (Piller et al., 2010, 1). Customers are actively involved in the innovation process of new products or services and the objective is to utilize the information and capabilities that they possess (Piller et al., 2010). This is in accordance with Vargo and Lusch (2004, 2008; Lusch & Vargo, 2006). in relation to the role of a company, which is lessened to act only as a facilitator of the co-creation process. O’Hern and Rindfleich (2010) support the idea of an empowered customer defining co-creation as a process where s/he is willing to create and contribute new ideas and able to select which should be developed

further for commercialization. According to Ramaswamy and Gouillart (2010) the central idea of co-creation is to engage people to create valuable experiences together. Also, Romero and Molina (2011) highlight creating of an entire experience around products or services in order to exceed the expectations of customers. Value co-creation is achieved through close interaction with consumers, tapping into their intellectual capital with the ultimate goal of co-producing and co-designing a product or a service (Romero & Molina, 2011). All in all, these definitions share common features:

•   Co-creation is a process between a firm and a customer

•   Co-creation requires collaboration and engagement from both sides

•   Purpose of co-creation is to create value for both sides

•   Personalized co-creation experience is the basis of value

Thus, I could propose that co-creation process refers to an activity where a customer is involved in developing new products or services in order to create value and valuable experiences together with a company. Value is based on human experiences rather than service processes and experiences stem from interactions (Ramaswamy, 2011). Engagement platforms facilitate ongoing interaction among firms and customers and generate mutual value through meaningful human experiences (Ramaswamy, 2011). Therefore, four elements are suggested for co-creation: experience mindset, context of interactions for collective intelligence, engagement platform and network relationships (Ramaswamy & Gouillart, 2010).

2.2.1.   Motivators and Outcomes of Co-Creation

The phenome of co-creation has grown in recent years and according to Zwass (2010) this is due to the ubiquity and accessibility of Internet in its multiple aspects. Internet bears several relevant opportunities: it’s a marketplace, distribution channel, network of relationships, platform and an interactive medium between individuals globally (Zwass, 2010). Internet connects both firms with consumers to participate in a co-creation community and to apply

their know-how in variety of online tools and platforms (Prahalad &

Ramaswamy, 2000, 2004). Empowering of customers motivates them to take more active role in the NPD process and increases their knowledge and skills and in turn enhances corporate growth and profitability (O’Hern and Rindfleich, 2010). Especially, involving customers leads to more innovative ideas and discovery and understanding of their latent needs that enable firms to plan more effective market-oriented NPD (Kristensson, Matthing & Johansson, 2008). Via Internet firms can reach more people outside their own customer group such as competitor’s customers and other potential non-customers. Additionally, communicating with customers online is cheaper and faster (O’Hern and Rindfleich, 2010) and allows firms to discover new opportunities that are valued by a customer (Witell et al., 2011). Successful NPD requires understanding of customer needs, but there needs might not be identified by using traditional market research methods (von Hippel, 2005). Customer dialogue and feedback enables companies to build more suitable products for the market thus increasing the likelihood of success and a sustainable competitive advantage (Prahalad &

Ramaswamy, 2004; Hoyer et al., 2010). Thus, including customers can improve the quality of products, reduce risk of failure and customer costs in terms of time and effort and increase the acceptance of the market (Hoyer et al., 2010).

Furthermore, interaction, involvement and engagement of customers develops loyalty and confidence towards the brand generating more solid relationship and customer referrals (Krishna, Lazarus & Dhaka, 2013). However, when creating new experiences for customers internal stakeholders should not be overlooked since these two are interrelated. Motivators for internal stakeholders are better experiences, economic profits, acquisition of knowledge, career opportunities, increased satisfaction and feelings of appreciation and higher self-esteem (Ramaswamy & Gouillart, 2010). Firms can maximize their lifetime value of attractive customer segments when they successfully manage the co-creation process and customer engagement within (Payne, Storbacka & Frow, 2008).

Further, two sources of competitive advantage can be detected: first increased

productivity (e.g. cost reduction) and second improved effectiveness (e.g. closer fit to customer needs, relationships, satisfaction) (Hoyer et al., 2010).

However, customers have various motivations to participate co-creation and these lead to different expectations, which might differ from the ones of companies. Also, consumers vary in their interest and ability to participate in co-creation effectively and only few have the willingness to be fully engaged (Hoyer et al., 2010). According to Zwass (2010) potential motivators in co-creation vary from altruistic to monetary. These include the following: desire to contribute, passion or enjoyment for a task, self-expression or identity, forming personal relationships, learning, acquiring social capital, recognition, own need/use, financial rewards etc. Nambisan and Bron (2009) identify four types of customer benefits: cognitive (learning), social (relationships), personal (status, self-efficacy) and hedonic (pleasure) benefits. Similarly, Etgar (2008) divide customer motivational drivers into three categories: economic (e.g. cost reduction), psychological (e.g. fun, self-expression) and social (e.g. status, social networks).

Confirming the previous literature, Hoyer et al. (2010) classify consumer motivators of co-creation into financial (e.g. profits, intellectual property), social (e.g. status, social esteem), technical (knowledge) and psychological (e.g. self-expression, enjoyment) depending on the stages of NPD. On the other hand, Füller (2010) draws distinction between intrinsic and extrinsic motives. The motivation can be purely intrinsic (e.g. fun, altruism), purely extrinsic (e.g.

financial reward) or something in between trough internalized extrinsic motives (e.g. knowledge, reputation). Füller (2010) considers that consumer’s motives to engage is a combination of various intrinsic and extrinsic factors and these motives change over time. Based on motivation research, Füller (2010) proposes ten motive categories to explain customer engagement in co-creation projects:

intrinsic playful task, curiosity, self-efficacy, skill development, information seeking, recognition (visibility), community support, making friends, personal need (dissatisfaction) and compensation (monetary reward) (Füller, 2010, 103). According to the authors above, the most common consumer motivators for co-creation are psychological and social factors such as forming relationships, status and

self-expression. If a customer voluntarily participates in co-creation and enjoys it, s/he is more likely to develop positive attitude, which in turn leads to higher customer satisfaction (Hoyer et al., 2010). Below a framework of consumer-level motivators, firm-level impediments and stimulators of co-creation at different stages of NPD giving a brief summary of current insights on the topic.

FIGURE 7. Conceptual Framework of Consumer Co-Creation (Hoyer et al., 2010)

In the academic literature, mostly the benefits of co-creation process are highlighted without giving any attention to the challenges or negative aspects.

Prahalad and Ramaswamy (2004a) state that not every co-creation scenario lead to positive end results. The challenge is to properly manage customer expectations and relationships (Hoyer et al., 2010). As mentioned earlier, firms and customers might have different expectations of the process, which can lead to failure in co-creation of value. Also, it can be challenging to recognize successful ideas from vast pool of customer inputs, which increases complexity of managing the firm-customer relationship (Hoyer et al., 2010). Managers must diminish control over strategic planning and be more open and transparent in their actions, which might prove to be challenging if the corporate culture supporting this is missing. However, definitely the downsides of co-creation and its impact on the relationship between a company and a customer is not researched enough considering the relevance of the topic.

2.2.2.   DART – Building Blocks of Co-Creation

In order to build a system for co-creation of value, four building blocks must be in place and work together. According to Prahalad and Ramaswamy (2004a) dialog, access, risk-benefits and transparency (DART) form the basis of interaction between a customer and a firm so that value can co-created within an eco-system (Figure 4). In order to develop a shared solution, the firm and the customer must become joint problem solvers. Meaningful dialogue leads to shared learning and engagement on both sides. This helps to solve one other’s problems, enhancing the experience and creating and maintaining a loyal community. Traditionally firms have benefited from possessing the information and tools that consumers lack. However, this information asymmetry is disappearing when consumers become more connected, informed, empowered and active. As information about products, technologies and profit margins become more accessible, consumers demand new levels of transparency that firms need to answer to. Further, open dialog, accessibility and transparency throughout the process will lead to a clear evaluation of risk benefits for both parties. Since consumers are increasingly participating in co-creation process nowadays, it is justified that they demand to be fully notified about possible risks associated with the product or service. When combining the above-mentioned elements of the DART model of value co-creation, companies can better engage consumers to become collaborators and create a rich experience. Firms can experiment with these elements to discover new business models, practices and/or enable compelling co-creation experiences since the customer experience goes beyond the product’s physical characteristics. Customers are not primarily interested in the product but what they can do with it and how satisfying is the customer experience (Grönroos, 2008). Different approach to growth and innovation is needed since traditional ways of practicing value creation are becoming obsolete in the emerging economy where value is unique to each individual. Despite co-creation being a highly topical matter, with the exception

of the DART model there is relatively little guidance or existing frameworks on how the co-creation process should actually be undertaken. (Payne et al., 2008).

FIGURE 8. Building Blocks of Interactions for Co-Creation of Value (Prahalad &

Ramaswamy, 2004)

2.2.3.   Co-creation Framework

Co-creation during innovation process has become more popular in recent years, but there is a lack of theories and practical information on how consumers should actually be involved during NPD in order to realize the benefits. Especially, there would be a need for deeper understanding of critical co-creation strategies in order to facilitate proactive market-oriented NPD (Kristensson, Matthing &

Johansson, 2008). Kristensson, Matthing & Johansson (2008) suggest that the following should be taken into consideration when planning key strategies on user involvement: (1) how to identify user needs; (2) users have different needs in various roles; (3) how to provide users with right tools; (4) how to motivate users; (5) how to generate ideas; (6) users lack knowledge of technology; (7) involving of a heterogeneous group of users to guarantee diversity of ideas.

Acknowledging this information gap, Payne, Storbacka & Frow (2008) propose a process-based conceptual framework for managing value in the co-creation

process (Figure 8). This framework consists of three components: customer, supplier and encounter value-creating processes. Both customer and supplier have their own value-creating processes that refer to resources and practices used to manage daily business and relevant stakeholder relationships. Encounter processes refer to interaction and exchange between the two that need to be managed well in order to develop successful co-creation opportunities.

FIGURE 9. Conceptual Framework for Value Co-Creation (Payne, Storbacka &

Frow, 2008)

Customer processes has three components: cognition, emotion and behavior. The customer’s experience of a supplier is a culmination of these three and has a critical role in value co-creation. Relationship experience leads to customer learning and a supplier can support customers with their experiences and learning process through active dialog. Supplier processes consist of design and delivery of customer experiences through reviewing co-creation opportunities, planning, testing, prototyping and finally implementing these with customers and developing proper metrics to evaluate the impact of their value propositions.

Business strategy starts from understanding a customer’s value creating process

and supplier decides where it may support for better co-creation of value and further design its own processes to align with those of a customer. This type of planning for co-creation is outside-in and aims to ‘listen, customize and co-create’

instead of merely ‘making, selling and servicing’. This framework of Payne, Storbacka & Frow (2008) highlights the roles of a supplier and a customer and how they can create value together and develop their core competencies by learning. By creating unique value with customers and to develop engagement programs supporting this, sustainable growth can be generated (Krishna, Lazarus & Dhaka, 2013).

Another relevant framework is developed by Krishna, Lazarus & Dhaka, (2013), which describes consumer participation in co-creation in sequential stages (Figure 9). When consumer experiences a product or service, the intensity decides the level of involvement and s/he develops expectations about the offering. The level of involvement and engagement decreases as we move from leader to watcher. Expectations evolve further into beliefs and actions and this process is called engagement. This can be either positive or negative depending how s/he has experiences the process so far. Depending on the degree of involvement of a firm, consumer engagement becomes either co-creation or falls under category creation. The same applies to the negative side too where instead of co-creating, a consumer can co-destroy the relationship.

FIGURE 10. Steps and Levels of Consumer Participation (Krishna, Lazarus &

Dhaka, 2013).