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Master thesis (in progress) Business Administration, Specialization: Strategy & Organization Supervisor: Prof. Dr. T. Elfring Joost de Boer Student number 1517597 Hence, the product or service is not any more the product or service that it used to be in terms of ‘end product’, but the purpose of a product or service is here seen as something that functions in order to achieve a certain amount of satisfaction. Changing the paradigm of customer value creation starts with the understanding that according to the S-‐D logic, value creation is a continuous process rather than a production process that ends at the phase of ‘value exchange’. Yet, Vargo & Lusch (2006) explicate, the S-‐D logic does not neglect the importance of value in exchange; however, they claim that ‘value in exchange’ exists only if ‘value in use’ occurs for the customer as well. Further, the relationship between customer and organization is considered to be continuous, inviting both to collaborate. Table 2.2 on the next page provides an overview of the fundamental differences between the goods-‐dominant and the service-‐dominant logic (Vargo and Lusch 2004), which was adjusted to the concepts used in this section. Table 2.2 | Adjusted G-D and S-D logic conceptual transitions Lusch & Vargo (2006) Goods-‐dominant logic Service-‐dominant logic Focus Goods (operand) Service (operant) Mode of exchange Products, Services Experiences Satisfaction Feature/attribute Solution Creating customer value Value-‐added Co-‐creation of value Financial Profit maximization Financial feedback/learning Remuneration Price Value proposition Determining supply and demand Equilibrium systems Complex adaptive systems Activities Supply chain Value creation network/constellation Marketing Promotion Dialogue Launch To market Market with Orientation Product orientation Service orientation From an S-‐D logic point of view, co-‐creation can also be seen as an important addition to customer relationship management (CRM). In their article in the Harvard Business Review, Rust, Moorman and Bhalla (2010) propose a shift in marketing departments from a focus on driving transactions towards the maximization of customer lifetime value. They argue that organizations should consider ‘reinventing the marketing department as a customer department’: replacing the Chief Marketing Officer for a Chief Customer Officer, placing customer managers instead of traditional brand managers, integrating customer-‐focused functions as ‘Customer Relationship Management’, Market Research and Research and Development into a customer department, and emphasizing the importance of customer services (Rust 2010). Their point of departure is that it is increasingly important to focus on the retention of customers by offering them a maximized customer lifetime value (CLV) instead of focusing on acquiring new customers. Bendapudi and Leone (2003) suggest that organizations ‘may want to encourage participation in production by customers who have a strong relationship with the firm’. In addition, Gummesson (2004) suggests the use of Return on Relationship (RoR) as a measure instead of Return on Investment (RoI), defining RoR as ‘the long-term net financial outcome caused by the establishment and maintenance of individual customer relationships’. Comparing these suggestions on the field of Customer Relationship Management and the paradigm switches that are proposed by the Service-‐Dominant Logic, they have one general thing in common: a 15
Master thesis (in progress) Business Administration, Specialization: Strategy & Organization Supervisor: Prof. Dr. T. Elfring Joost de Boer Student number 1517597 shift towards the involvement and retention of customers. As support for these developments is created by the increase of technological ability to reach customers, CRM and S-‐D Logic describe a potential new direction for marketing processes and the departments that drive them, by involving the customer. Co-‐creation and the service-‐dominant logic One of the fundaments of the S-‐D logic is the co-‐creation of shared value. This assumes that value should be created together with the customer in a collaborative process, and not created by the producer for the customer. Cova and Salle (2008) based their model for involving customer network actors on the S-‐D Logic; Payne et al. (2008) cite Vargo & Lusch (2004a) while creating a conceptual framework for value co-‐creation: “The customer is always a co-‐creator of value: there is no value until an offering is used -‐ experience and perception are essential to value determination”. However, when reaching toward a new, collaborative logic of value creation and goal-‐based satisfaction, the customer will have to get involved in the process. This does not only imply involvement at the end of the line, but also from the very start of the value creation process: the phase of innovation. Consequent to this increasing customer involvement, scholars have linked S-‐D logic with innovation processes in organizations. Michel et al. (2008) elaborate on the fact that the traditional goods-‐dominant logic falls short to explain and understand many recent discontinuous innovations. Discontinuous innovations, or revolutionary innovations, are innovations that have changed traditional markets and created new ones, supported by new techniques like Web 2.0 and the rise of online social media (Albors, Ramos et al. 2008). This new type of connection does not only connect customers with customers and organizations with other organizations, but also provides opportunities for cross-‐link communication. But how do organizations that have always used a G-‐D logic approach in their innovation processes adapt to these changing circumstances? This cannot singularly be explained by the service-‐dominant logic, which mostly has a marketing focus – therefore, the use of co-‐creation for (open) innovation purposes is discussed in the next section. § 2.2.2 | Co-‐creation in innovation: the open innovation paradigm One of the current leading innovation paradigms is open innovation. Before clearly defining this paradigm, it is useful to define what exactly is considered as ‘closed’ innovation. Closed innovation, or traditional innovation, refers to a closed-‐circuit model where internal research and development activities lead to internally developed products that are then distributed by the same firm (Chesbrough 2006). Or as Grönlund et al. (2010) define closed innovation: it is the development and marketing of new products that takes place within the boundaries of the same firm. Resources are fed into a development funnel for inventions to appear in the end, mostly without seriously considering alternative ideas from outside the organization. Open innovation, however, intends to use a different perspective on innovation. The term ‘open innovation’ was coined by Henry Chesbrough (2003; 2006), defining it as a paradigm that “assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance technology”. Open innovation attempts to open up the traditional, closed circuit of research and 16
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