Case Study on Customer Engagement in Co-Creation Process

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C ÂSE S ^{TUDY ON} C ÛSTOMER E NGAGEMENT IN C Ô -

CREATION P ^ROCESS

University of Jyväskylä School of Business and Economics

Master’s Thesis 2018

Author: Anu Lapinoja Supervisor: Mari Suoranta

UNIVERSITY OF JYVÄSKYLÄ

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JYVÄSKYLÄ UNIVERSITY SCHOOL OF BUSINESS AND ECONOMICS Author

Anu Lapinoja Title

Case Study on Customer Engagement in Co-creation Process Subject

International Business and Entrepreneurship Type of work Master’s Thesis Time

April 2018 Number of pages

73 Abstract

PURPOSE - Technological advantages have changed the dynamics of today’s business environment. The traditional roles of companies and consumers are shifting away towards more connected setting where customers become co-creators and a new source of competence for companies. The basis of value has changed from a company- and product-centric view to co-created experience and due to intensified competition, managers must co-create unique value through personalized interaction. In order to capture competitive advantage during coming years, companies must embrace this new experience-centric view of innovation and harness their customer competence. Many research highlights the importance of engaging customer in the co-creation process, however, there is no explicit instruction of how this should actually be done. For this reason, the primary purpose of this thesis is to understand the relationship between value co-creation and customer engagement and additionally, to define the key components, challenges and learnings derived from the process.

METHODOLOGY

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This research is an exploratory, qualitative research in nature describing the relationship between co-creation and customer engagement. The methodology for understanding the process is secondary in terms of a literature review followed by a primary research of a single case study design conducted via in-depth, semi-structured interviews. Data will be collected from experts involved in the co- creation field. The objective is to gain more understanding of value co-creation and customer engagement process.

FINDINGS

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The findings suggest that the key in managing customer engagement in co- creation process is setting frames for innovation, proper expectation management, goal alignment and open communication of these throughout the relationship. Furthermore, a company can increase the customer value by having all the internal processes, frameworks and guidelines in place and to communicate these throughout the organization to support the external interaction and relationship building with customers.

Keywords

New Product Development, Value Co-creation, Customer Engagement, Case Study Location

Jyväskylä University School of Business and Economics

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FIGURES

FIGURE 1. Structure of Study

FIGURE 2. The Traditional Concept of a Market FIGURE 3. The Emerging Concept of a Market

FIGURE 4. Traditional Approach vs. Customer-as-Innovators Approach FIGURE 5. Good-Dominant Logic vs. Service-Dominant Logic

FIGURE 6. Value Creation Spheres

FIGURE 7. Conceptual Framework of Consumer Co-Creation FIGURE 8. Building Blocks of Interactions for Co-Creation of Value FIGURE 9. Conceptual Framework for Value Co-Creation

FIGURE 10. Steps and Levels of Consumer Participation FIGURE 11. Theoretical Model of Customer Engagement

TABLES

TABLE 1. Overview of Interviews

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1 INTRODUCTION

The purpose of this chapter is to provide background for the topic of the master’s thesis.

Then, the purpose of this study and research question are presented. The chapter ends with defining the focus and by introducing the structure of this study.

1.1 Background

In the traditional view on the market, innovation occurs inside a firm and outside markets. Customers are outside the firm and seen as passive audience with predefined roles of consumption. Firms possesses the unilateral role in creating value (Porter, 1980). Thus, the firm and the customer have separate roles of production and consumption and the value is exchanged at the market through products or services. In this perspective, the market is viewed as separate from the value creation process (Kotler, 2002). The traditional view on the market has been dominated by company- and/or product-centricity, which in turn, has affected the perception of the value creation as well. This conventional thinking in business fails to consider options of co-creating in an ecosystem where everyone wins. The potential of involving people in the process was largely ignored in business strategies that were solely based on economic merits.

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Many studies have confirm that involving users leads to more innovative ideas and understanding of customer needs (Kristensson, Magnusson &

Matthing, 2002). According to Kristensson, Gustafsson and Archer (2004), involving users during new product development (NPD) process leads to more creative and easily implemented ideas that are more highly valued by customers.

Prahalad and Ramaswamy first introduced the concept of ‘co-creation’ as the basis for value creation in 2004 in order to describe the changing conditions of the market. The traditional roles of companies and consumers were shifting away towards more connected setting where customers become co-creators and a new source of competence for companies. Further, in 2004 Vargo and Lusch introduced service-dominant logic (S-D logic) stating that instead of goods, services are the primary unit of exchange and the customer is a coproducer of service. According to the S-D logic, value is perceived and determined by customers themselves based on “value-in-use” in oppose to the traditional goods-centered logic (G-D logic) where value is determined by the producer in

“value in exchange”.

Technological advantages have changed the dynamics of today’s business environment. The market is challenged by connected, informed, empowered and active consumers (Prahalad & Ramaswamy, 2004a). Customers want to influence and engage in active dialogue with companies and the market is becoming a forum for conversation and interaction. The basis of value has changed from a company- and product-centric view to co-created experience and due to intensified competition, managers must co-create unique value through personalized interaction with customers. Engagement platforms allow ongoing interaction between companies and customers that will result in a co-creation process where mutual value is generated through productive and meaningful human experiences (Ramaswamy, 2011). In order to capture competitive advantage during coming years, companies must embrace this new experience- centric view of innovation and harness their customer competence. Co-creative strategy value stems from building new interactions and experiences and focuses on interest of all stakeholders within the ecosystem. The key to success of this

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new organizational design is to put the human experience to the center of all operations. (Ramaswamy & Gouillart, 2010).

Internet has become a powerful platform of collaborative innovation and customer engagement due to its speed, reach and flexibility. Companies can utilize various internet based mechanisms to support dialogue, consumer learning and to apply customer know-how in variety of online tools and platforms (Prahalad & Ramaswamy, 2000, 2004; Van Doorn et al., 2010). Engaged customers play a key role in co-creation and in general engaging customers tend to increase loyalty, satisfaction, trust and commitment (Hollebeek, 2011; Brodie, Ilic, Juric & Hollebeek, 2013). The success of a firm is determined by its ability to understand customer engagement process and how trust, involvement and affective commitment is developed in the mind of customers. Managers should be concerned of how to measure the level of engagement and develop strategies to establish influential emotional bonds in co-creation process (Bowden, 2009).

Many research highlights the importance of engaging customer in the co- creation process (Prahalad & Ramaswamy, 2004; Van Doorn et al., 2010; O’Hern

& Rindfleich, 2010), however, there is no explicit instruction of how this should actually be done. For this reason, the primary purpose of this thesis is to understand the relationship between value co-creation and customer engagement and additionally, to define the key components, challenges and learnings derived from the process. In this study the focus is on B2B side of business, but the terms customer and end-user are used interchangeably throughout the research. The in-depth, semi-structured interviews with co- creation experts were executed to gain more understanding of value co-creation and customer engagement process. In this particular single case study, more exploratory approach has been taken to discover new insights and understand a phenomena in a particular concept; how it works in an organization, what could be improved and how internal and external factors effect on it.

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1.2 Research Objectives and Questions

The main purpose of this thesis is to understand the relationship between value co-creation and customer engagement. In addition, this study will focus on defining the key components, challenges and learnings derived from the process.

In order to understand the current process and to identify possible improvements, the following research question have been identified to focus in this research study:

RQ1: How to manage customer engagement in co-creation process?

RQ2: How to increase customer value in co-creation process?

The purpose of this study will be achieved via secondary and primary research.

Earlier literature, theories and studies about new product development, value co- creation and customer engagement will be compared with empirical findings conducted during this research. The primary research will be accomplished via exploratory, qualitative methods. In-depth, semi-structured interviews with co- creation experts will be conducted in order to understand the case company’s current view of the process.

1.4 Focus Area

This study has been decided to limit to a company perspective by interviewing experts in co-creation field. Thus, the research does not include the customer perspective of the process. The research will be conducted with a B2B perspective as I focus on this relationship during the co-creation process. The terms customer and end-user are used interchangeably throughout this research. The customer

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or user is limited to an entity who is in co-creation process with a company.

Further, the case company is producing software products, thus, this study is context-dependent to Information Technology industry. However, services will not be included in the scope of this study.

Through my research I would like to provide new insights into customer engagement in co-creation and how to increase customer value throughout this process. I believe the findings could support the customer engagement strategies that companies apply when they engage in co-creating process and want to manage that relationship effectively.

1.5 Structure of the Study

This study will be divided into six chapters as illustrated below. This makes it easier for a reader to follow the structure when progressing through the master’s thesis.

FIGURE 1. Structure of Study

In chapter 1, I will provide necessary background information, research objectives and questions in order to give an overall context to this study. In chapter 2, the main theories giving direction to the empirical data collection will be outlined. Chapter 3 will introduce the chosen research design and data collection methods that have been utilized when carrying out this research.

Chapter 4 will present empirical findings derived from a single case study and aims to answer the research questions. In chapter 5 the findings of the study will be analyzed against the literature review. In the last chapter, a summary of the

Introduction Literature Review

Research Methods and

Data Collection

Empirical

Findings Discussion Conclusion

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study, managerial implications as well as limitations and suggestion for further research will be presented.

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2 LITERATURE REVIEW

Empirical research requires a thorough theoretical outline to be based on. It will form the starting point for generating knowledge and new insights about the research problem.

This chapter will focus on examining and discussing the existing academic literature about new product development, value co-creation and customer engagement in order to establish a solid theoretical framework for this study. Key concepts, theories and earlier empirical researches will be presented.

2.1. Changing Role of a Customer

In a traditional view, the concept of a market is a firm- or product-centric and customers are only seen as a demand target for a firm’s offerings (Figure 1). It is a push system, where a firm produces products and/or services and then pushes those to employees, suppliers, partner organizations and customers (Lee, Olson

& Trimi, 2012). Value is created by a firm through its activities, in a form of the product being distributed and exchanged at the market against monetary compensation (Vargo & Lusch, 2008). Companies focus on the interaction and extracting economic value, which is the basis of customer experience (Prahalad

& Ramaswamy, 2004a). The purpose and flow of communication is one-way, from a company to a customer in order to gain access and target predetermined group of customers (Prahalad & Ramaswamy, 2000). Customers are regarded as passive buyers thus companies have limited understanding of their experiences and knowledge (O’Hern & Rindfleich, 2010).

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FIGURE 2. The Traditional Concept of a Market (Prahalad & Ramaswamy, 2004)

Technological advances have changed the way of doing business and the trend is moving towards service economy and globalization (Krisna & Dhaka, 2013).

The market is challenged by informed, networked, empowered and active consumers that are seeking to exercise their influence and to co-create value with a firm (Prahalad & Ramaswamy, 2004a). These changes have altered the market power and there is a shift away from traditional roles of companies and customers to become co-creators of value. The evolution and transformation of customers means that they are part of the enhanced network and co-create and extract business value through active dialogue with manufacturers of products and services (Prahalad & Ramaswamy, 2000; Payne, Storbacka & Frow, 2008;

O’Hern & Rindfleich, 2010). The marketplace becomes a forum where customers are the source of competence for corporations. Customers are no longer passive buyers or average statistics, instead they possess knowledge and skills, are willing to learn, experiment and engage in dialogue to create personalized experiences (Ramaswamy, 2009).

However, difficulty is to fully understand customers’ needs since even when customers know precisely what they want, this information cannot be

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clearly transferred to manufacturers (Thomke & von Hippel, 2002). The amount of choices of products and services make it also challenging for companies to differentiate themselves. As a result, in the emerging concept of the market (Figure 2), the focus is on consumer-company interaction and co-creation experiences are the basis of value. The roles of a company and a consumer converge and both are collaborators and competitors in co-creation and in extracting economic value (Prahalad & Ramaswamy, 2004a) and consumers become co-creators of products and services that they buy and use (O’Hern &

Rindfleich, 2010).

FIGURE 3. The Emerging Concept of a Market (Prahalad & Ramaswamy, 2004)

Since customer’s desired experiences cannot be decided priori, firms must create experience environments that actively involve customers to accommodate a wide range of potential co-creation opportunities (Prahalad & Ramaswamy, 2003).

According to Grönroos & Voima (2011), in order for value to exist, there needs to be various touchpoints of interaction between the customer and the company throughout the process. The purpose of firms is to customize its offerings according to individual needs and aim for the maximum participation of consumers (Vargo & Lusch, 2004).

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The traditional approach of customizing new products according to customer segments is drastically far from co-creation process. Customization is in line with goods-dominant logic where value is built into a product or service and exchanged at the market with a customer against monetary compensation (Kristensson, Matthing & Johansson, 2008). In order to successfully develop new products two types of information are needed: information of customer needs and how to solve these (Thomke & von Hippel, 2002; von Hippel 2005). Usually customers possess information on the first type and companies about the second.

To overcome this information asymmetry, some companies have abandoned their efforts of understanding customer needs, instead, they turn their customers into innovators and equip them with right tool kits to design and develop their own products (Figure 3). In this way, a company can bypass the extensive and time-consuming trial and error face. On the other hand, companies are outsourcing their valuable service, a major source of competitive advantage, to customers who are not experts in design. Also, many are reluctant to increase customer autonomy due to concerns about losing power and control over products or leaking of valuable information (von Hippel 2005). This type of approach also requires a radical change in management mind-set and rethinking of business practices. (Thomke & von Hippel, 2002).

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FIGURE 4. Traditional Approach vs. Customer-as-Innovators Approach (Thomke & von Hippel, 2002)

The transformation from products to co-created experiences is an ongoing shift and managers must change their focus from products and services to the experience space and engage with the extended network including consumer communities. Traditional innovation is company- and product-centric in contrast to experience innovation which focuses on experiences desired by individual consumers. Convergence of technologies and industries, consumer and company roles are changing the purpose and process of innovation and the new competitive space for companies is centered on personalized co-creation experiences through purposeful dialogue between a consumer, a network of companies and consumer communities (Prahalad & Ramaswamy, 2003, 2004).

Also, this change in paradigms requires rethinking of the role of marketing in the value creation process (Kotler et al., 2010). Nowadays consumers have access to vast amount of information, which enables them to participate in the innovation

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process and coproduce value through customized offerings together with companies (Payne et al., 2008). This brings new sources of competitive advantage for companies who can better understand their customer needs and preferences (Lusch & Vargo, 2006) and customers that feel more active and engaged with a company. Thus, value is co-created for both parties (Grönroos, 2008) and therefore co-creation is appealing for companies and consumers alike.

2.2. 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.

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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

UNIT -‐‑ Tangible goods

"operand resources"

ROLE -‐‑ Customer is a recipient of goods

VALUE -‐‑ Determined by producer "value-‐‑in-‐‑

exchange"

S-‐‑D logic

UNIT -‐‑ Knowledge and skills "operant

resources"

ROLE -‐‑ Customer is an active participant and

a co-‐‑creator

VALUE -‐‑ Determined and created with consumer "value-‐‑in-‐‑

use"

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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.

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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

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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

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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

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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-

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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.

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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

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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

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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

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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.

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

Dhaka, 2013).

2.3. Customer Engagement

Companies have recognized the importance of customers when creating and sustaining their competitive advantage. In nowadays’ networked business world, collaboration with customers and other companies has become the focus of value creation activities and most importantly, to create value through product innovation. Traditional perspective on customer engagement has been firm- centric, viewing customers as passive recipients of innovation and value creation activities, information flowing to one direction only from a firm to customers (Prahalad & Ramaswamy, 2004). There is a lack of customer understanding and little emphasis on active dialog that would engage customer communities, prospects and other potential customers. Internet has become a powerful platform of collaborative innovation and customer engagement due to its speed,

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reach and flexibility. Companies can utilize various internet based mechanism to facilitate customer engagement in co-creation process. Virtual communities enable active dialogue with customers tapping into the social aspect of customer knowledge thus serving as a powerful platform for collaborative innovation.

(Sawhney, Verona & Prandelli, 2005).

The term “engagement” has been used extensively in social sciences, psychology and organizational behaviour leading to various approaches and definitions. However, only in recent years customer engagement has received more attention in marketing and service literature as well (Brodie, Hollebeek, Jurić & Ilić, 2011). Vivek, Betty and Morgan (2012) focus on the behavioral aspect of customer engagement defining it as “the intensity of individual’s participation in and connection with an organization’s offerings and/or organizational activities, which either the customer or the organization initiate” (2012, 127). Similarly, Van Doorn et al. (2010) focus on customer’s behavior that center on a brand or a firm, beyond purchase resulting from motivational drivers. Furthermore, Bowden (2009) and Brodie et al. (2011) view customer engagement from a psychological perspective.

According to Bowden (2009) customer engagement is a psychological process that forms customer loyalty for a new customer as well as for a repeat purchase customer of a service brand and is concerned how loyalty can be maintained.

Brodie et al. (2011) base their conceptualization of customer engagement on foundational premises of the S-D logic by Vargo and Lusch (2008), defining it as

“a psychological state that occurs by virtue of interactive, cocreative customer experiences with a focal agent (e.g. a brand) in focal service relationships” (2011, 260). Moreover, Hollebeek (2011) view customer-brand engagement as a customer’s motivational state of mind that is characterized by cognitive, emotional and behavior activity towards a brand.

Customer engagement is suggested to improve the performance of an organization, increase sales, profitability and competitive advantage (Hollebeek, 2011). Engaged customers can play a key role in marketing providing referrals of products and services, participate in the innovation process and co-create value and experiences (Brodie et al., 2011; Prahalad & Ramaswamy, 2004). Engaged

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customers can a source of knowledge and can support firms in ideation and development of new products and services, existings brands and in trial of beta products (Van Doorn et al., 2010). According to Van Doorn et al. (2010) customer engagement behaviors include word-of-mouth activity, recommendations, online reviews and/or blogging, which from a firm’s perspective can be classified either positive or negative based on the valence of the content. The level of customer engagement may also be determined by relative resource endowments such as time, effort and money. However, in general engaging customers tend to increase loyalty, satisfaction, trust and commitment (Hollebeek, 2011; Brodie, Ilic, Juric & Hollebeek, 2013). Engaged customers exhibit stronger connection and emotional bonding with a brand and belonging to a community generates affinity and feelings of empowerment (Brodie et al., 2013). Overall, customer engagement has cognitive, attitudinal and behavioral consequences for many different stakeholders e.g. competitor’s customers in additional to a focal firm and a customer. (Van Doorn et al., 2010). The below model by Vivek, Betty and Morgan (2012) incorporates the cognitive, emotional, behavioral and social elements of customer engagement when an individual is interacting with a brand and/or a product both within and outside of exchange situations.

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FIGURE 11. Theoretical Model of Customer Engagement (Vivek, Betty & Morgan, 2012).

The success of a firm is determined by its ability to understand customer engagement process and how trust, involvement and affective commitment is developed in the mind of customers. Managers should be concerned of how to measure the level of engagement and develop strategies to establish influential emotional bonds between brands and customers (Bowden, 2009). Firms may develop processes and engagement platforms online to support customer-to- customer dialogue and consumer learning (Van Doorn et al., 2010). The changing role of a customer is suggesting that firms might not be able to create products, services alone, but should increasingly invite communities in their operations to explore the potential of customer knowledge and to create value (Jaakkola &

Alexander, 2014). A firm should consider customer engagement from a a goal alignment perspective. If a customer’s and a firm’s goals are aligned, customer engagement behavior is more likely to have a positive impact on a firm’s performance and overall customer experience. On the contrary, if there is a misalignment between goals and this is not communicated properly, customer

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engagement behavior may have negative outcomes (Van Doorn et al., 2010).

When customers are passionate about the brand and/or the product, feel empowered and sense ownership over the offering, they are more willing to contribute to the success of the firm (Jaakkola & Alexander, 2014). The key challenge is to understand the dynamics of customer engagement and how it changes and evolves over time. Therefore a firm should proactively manage customer engagent process, identify and react to changes in customer behavior and evalue these against both its short- and long-term objectives. (Van Doorn et al., 2010).

2.4. Summary

Earlier, business strategies and operations were solely based on economic merits that led companies to cut costs wherever necessary in order to save money and time. Focus was on identifying and fixing “paint points” that cause inefficiencies in the system. However, this conventional thinking is business fails to consider options of co-creating in an ecosystem where everyone wins. Business strategies are defined outside this scenario despite uncertainties that make these kinds of master plans impossible. The potential of involving people in the process and creation of positive experiences is largely ignored by managers who are used to focus on efficiency and protection of assets. Co-creation challenges this type of thinking and leads to discovery of new sources of competitive advantage and business models. The traditional belief value being exchanged at the market via transaction is not in line with the new logic of co-creation which argues that customers are not only targets of value propositions but also actively create value on their own and together with a company (Prahalad & Ramaswamy, 2004;

Vargo & Lusch, 2004). In an organization, co-creation has an impact on six different domains: organizational culture, learning, dynamics, resources and capabilities, customer valuation and brand communities (O’Hern & Rindfleich, 2010). According to Ramaswamy and Gouillart (2010), planning a co-creative strategy includes four critical propositions that companies should take into

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account. The first proposal is that co-creation must produce value for all stakeholders (customers, employees, suppliers etc.) otherwise it will not trigger participation. Value can be either psychological (e.g. greater satisfaction, higher self-esteem), economic (e.g. skills, revenues, efficiency) or social (relationships).

The second proposition is that instead of putting emphasis on creating economic value, companies should focus on co-creating experiences for all stakeholders.

The third proposition is about stakeholders being able to interact directly and have a dialogue with another. Most business problems are complex and require wide range of expertise to work on the solution. The final proposition is that companies should provide engagement platforms for all stakeholders to be able to interact directly and share experiences. Co-creative strategy value stems from building new interactions and experiences and focuses on interest of all stakeholders within the ecosystem. The competitive advantage is achieved through engagement of all stakeholders leading to higher productivity, creativity and lower costs and risks. (Ramaswamy & Gouillart, 2010).

Redesigning of an organization starts by building engagement platforms that allow multiparty interactions with all stakeholders and creation of new experiences for them. However, successful implementation of these new practices might require some changes in the current organizational culture, which might be complicated by deeply embedded attitudes and behavior (Vargo

& Lusch, 2004; von Hippel, 2005; Ramaswamy & Gouillart, 2010). O’Hern and Rindfleisch (2010) state that the success of collaborative NPD depends highly of a company’s ability to acquire, learn and apply know-how from its customers and other stakeholders. Customers are the new source of competition for companies and by establishing a relationship, companies have access to this new source of resources and capabilities that can supplement their own internal value creation activates (Prahalad & Ramaswamy, 2000). The boundary between producers and consumers is blurred and firm’s resources should be viewed from a broader network-based perspective instead focusing only on internal assets (O’Hern & Rindfleich, 2010). Especially, online brand communities can be a good source for co-creation activities (O’Hern & Rindfleich, 2010). Over time,

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companies will realize economic benefits that give push to continue with this direction and explore new strategies to apply co-creation. The key to success of this new organizational design is to put the human experience to the center of all operations. (Ramaswamy & Gouillart, 2010).

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3 RESEARCH METHODS AND DATA COLLECTION

The purpose of this chapter is to provide information on how this study has been conducted and empirical data collected. In the following chapter of this master’s thesis the choice of the research method, design and data collection process are presented and justified.

3.1 Qualitative Research

Qualitative research is often compared against quantitative research even though both methodologies have a lot of internal variety but makes the understanding of key differences easier. Qualitative approach focuses on interpretation and understanding of complex phenomena and meanings which people attach to it within their social context (Ritchie & Lewis, 2003) whereas quantitative approach is concerned on testing hypothesis and statistical analysis. Qualitative methods are appropriate to address how, what and why questions to create rich and multiple answers (Carson et al., 2001). Furthermore, quantitative research is subject to structured and standardized way of collecting and analyzing of data whereas qualitative studies tend to be more exploratory and flexible in its design.

(Eriksson & Kovalainen, 2008).

The aim of qualitative studies is a holistic understanding of the process rather than the structure and provide a detailed description of events and how people experience them (Carson et al., 2001). Qualitative methods are especially suitable when the purpose is to describe how people make sense of the world and interpret their experiences (Merriam, 2014). Qualitative researchers understand reality as socially constructed and interpreted through cultural meanings (Eriksson & Kovalainen, 2008). Typical for a qualitative approach is that the researcher has a key role in data collection and analysis (Merriam, 2014).

Advantages of this are that during data collection a researcher is able to be responsive, adaptive, clarify meanings and check for accuracy of interpretation.

In additional to verbal communication, a researcher may observe nonverbal cues

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that can increase understanding of the topic. However, a researcher being the primary instrument for data collection and analysis has shortcomings and biases that might have an effect on the subjectivity of the research. This should carefully be taken into account when interpreting results and making generalizations.

(Merriam, 2014).

The characteristics of qualitative research allow flexibility and is suitable when conducting research in an organizational setting (Carson et al., 2001). Since the overall focus of this master’s thesis is in-depth understanding of the relationship between value co-creation and customer engagement and how interviewees experience it, qualitative research design is the most suitable for this particular study. The data was collected from one single organization thus a case study approach was applied. Details of this approach will be presented in the next chapter.

3.2 Case Study Approach

Case study is defined by Robson (2002 as cited in Saunders, Lewis & Thornhill, 2007, 139) as “a strategy for doing research which involves an empirical investigation of a particular contemporary phenomenon within its real life context using multiple sources of evidence”. Similarly, Yin (2008 as cited in Merriam, 2014, 40) highlights the suitability of a case study when boundaries between the phenomenon studied and the context within are not so clear. However, rather than a research strategy or a method, a case study should be seen a research approach since there are hardly any limit on the use on empirical data or on methods analyzing data (Eriksson & Kovalainen, 2008). Furthermore, case studies can be used to provide description of a phenomenon, testing or formulating of a theory (Eisenhardt, 1989).

A key characteristics of a case study research is the unit of analysis, ‘a case’, which is determined by the particular research problem to be solved or questions to be answered (Carson et al., 2001). A case study is suitable if a researcher wants to gain a holistic understanding of the context and generate answers to how, what

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and why questions (Carson et al., 2001). Hence, case studies are often used in explanatory and exploratory research to explain relationship between two variables or to find out new insights of a phenomenon (Saunders et al., 2007).

According to Eriksson & Kovalainen (2008) there are two ways of conducting a case study. An intensive case study research aims to understand one single case thoroughly and to explore perspectives of the people involved within in order to provide a holistic description of an unique case. The objective of this type of a study is not to produce generalizable knowledge, whereas an extensive case study research focuses on developing, testing or elaborating theory by replicating cases in another context.

Moreover, a case study research may be carried out as a single- or a multiple case study (Saunders et al., 2007). For this particular master’s thesis, an intensive single case study research method, which is exploratory in its nature, is chosen since the purpose of this study is to explore dynamics of a specific case and increase understanding on customer value and engagement during co-creation process in one single organization. Moreover, comprehend the current co- creation process and compare it to the theory. Thus, in this study ‘a case’ is defined as one business organization, where eight experts from the co-creation field were interviewed. These are presented in more detail in the end of the chapter 3.5. An advantage of an exploratory type of a research is that it is flexible and a researcher may change direction as new data or insights appear (Saunders et al., 2007). Similarly, an intensive case study could be described as a constant interplay with theory and empirical data (Eriksson & Kovalainen, 2008), which goes well with the way of working with this master’s thesis.

3.3 Data Collection Methods

Collection of empirical data for case studies usually starts with a researcher defining preliminary topics, questions or problems that drive the research process. However, as mentioned above new insights might appear during the process that change the direction of the research. The advantage of a case study

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is its flexibility that allows these changes and a researcher may refocus him/herself as the research process evolves. In this intensive single case study, topics were defined prior reading academic literature. There was a need to study the topic further in the subject organization, thus research questions were based on previous knowledge and experience of the researcher. Chosen research topics were discussed thoroughly and verified with an experienced colleague before proceeding with interviews. Also, the found research gap affected the formulation of research questions and academic literature was studied prior in order to deliver new information on the topic. (Eriksson & Kovalainen, 2008).

Empirical data can be collected from primary and secondary sources.

Secondary data can be both textual (annual reports, web pages etc.) or visual (records etc.) that already exist (Eriksson & Kovalainen, 2008). In this research academic journals and books, a case company’s webpages, intranet, PowerPoint presentations and researcher’s prior knowledge were used as secondary data to provide material for designing the empirical research questions, to give background information of the current co-creation process and to generate theoretical framework for this study.

The most typical method for collecting primary data in qualitative studies are in-depth interviews. The presumption when using in-depth interviews is that interviewees possess unique knowledge of social life that can only be acquired through verbal communication. The aim is to gain rich empirical data as experienced by selected individuals on a particular topic. In-depth interviews can be considered as conversation that require active asking and listening from a researcher. (Hesse-Biber & Leavy, 2006). However, as noted earlier, the subjectivity of a researcher should be taken into consideration when analyzing results since s/he might have effect on interviewee’s responses during data collection process. Interviews can be structured, using standardized questions, semi-structured or informal and unstructured conversations between a researcher and a interviewee (Saunders et al., 2007). In this particular research semi-structured interviews were used to collect empirical data. When conducting a semi-structured interview, a researcher has prepared a list of topics or questions

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that guide the conversation, but these may vary from interview to another depending on the organizational context and the flow of conversation (Saunders et al., 2007; Eriksson & Kovalainen, 2008). The advantage of this type of a research technique is that it allows respondents to talk freely about their topics of interest that might lead the conversation to unexpected directions and discover knowledge that was not though of beforehand by a researcher (Hesse-Biber &

Leavy, 2006).

In this study there were two main themes that guided interviews: co- creation and customer engagement. To answer the main research questions, interview questions were planned accordingly around these two main themes.

Furthermore, basic information about interviewees, their roles and their experience in co-creation was discussed in the beginning of each interview. Main interview questions are presented in Appendix 1. Almost every interview was done face to face and the rest by Skype with the approximate duration of 60min each. All interviews were recorded and transcribed. Overview of semi-structured interviews of experts is presented in more detail in Table 1 below.

3.4 Data Analysis

According to Saunders et al. (2007), due to variety of qualitative research approaches, there is not only one right strategy to apply with analysis of qualitative data. Some strategies can be highly structured and formalized, whereas others count more on interpretation of a researcher. When having chosen a case study design, whether a single or multiple case, a researcher starts with analyzing every single case separately, which is called within-case analysis (Eriksson & Kovalainen, 2008). This is followed by cross-case analysis, where a researcher looks for differences and similarities between cases and mirrors these against theory (Eriksson & Kovalainen, 2008). Usually the first step in managing and analyzing qualitative data is transcribing it followed by identifying key themes for further exploration (Hesse-Biber & Leavy, 2006; Saunders et al., 2007).

Depending on the aim of a research, theories can be either developed or tested

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against identified relationships from empirical data to reach conclusions (Saunders et al., 2007).

However, in this particular single case study, more exploratory approach has been taken. The focus of this type of a study is to discover new insights and understand a phenomena in a particular concept; how it works in an organization, what could be improved and how internal and external factors effect on it (Carson et al., 2001). After transcribing the conducted interviews, the data was categorized into meaningful categories emerging from the data. These categories provide structure and are guided by the research questions that form the focus of this study. The analysis continued by identifying key patterns and relationships from the data, which are presented further in chapter 4. The emphasis of this study is to provide in-depth knowledge and recognize relationships between co-creation and customer engagement as moving towards generation of understanding of a phenomenon.

3.5 Case Company and Expert Interviews

Due to the nature of this study and research problem, number of cases is not relevant. The focus is on in-depth understanding of a phenomenon and therefore the key requirement is to continue the research as long as a the researcher has acquired enough data to analyze and understand the phenomenon thoroughly (Carson et al., 2001).

For this particular research, one single organization was chosen and within the organization eight innovation experts from different product teams were interviewed. Thus, these experts could be considered as embedded cases or units of analysis within a single case (Saunders et al., 2007). The chosen case company is an innovation center exploring and developing new technologies for the digital transformation of the parent company, a multinational software corporation.

More details of the case company cannot be given due to professional confidentiality. The case company approaches co-creation unconventionally and

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turns disruptive ideas into proof-of-concepts with co-creation partners, therefore being perfectly suitable research object for this study. The case company is operating in B2B field thus the terms customer and end-user are used interchangeably throughout this research

Prior knowledge of the author and support from an experienced colleague guided the selection of experts. Interviewees were selected from different product teams in order to guarantee an extensive overview of the phenomenon.

Additionally, two interviewees work in a customer phase being responsible of customer engagement strategies thus providing important feedback from a slightly different viewpoint. All the experts have several years of experience of working with customers in the co-creation field. In Table 1 below the status of the interviewee as well as the type and duration of the interview are presented in more detail.

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TABLE 1. Overview of Interviews

No. Interviewee Date Type Duration

Expert 1 Innovation Director 22.07.2017 Face to face 62 min Expert 2 Chief Economist 25.07.2017 Face to face 65 min

Expert 3

Business Development

Manager 25.07.2017 By skype 50 min

Expert 4

Senior Business Development

Manager 26.07.2017 Face to face 47 min

Expert 5

Innovation Strategy

& Implementation 31.07.2017 Face to face 24 min Expert 6 Customer Officer 03.08.2017 Face to face 24 min

Expert 7

Head of Strategy &

Operations 03.08.2017 By skype 54 min

Expert 8

Co-founder/

Product Manager 21.08.2017 Face to face 44 min

Case Study on Customer Engagement in Co-Creation Process