A perspective of the firm as an autonomous knowledge creator that learns about customers and creates value for them is increasingly redundant. Now, firms are exploring alternative modes and building capabilities to co-create new knowledge and innovate superior and mutual value with their customers. Such a shift in assumptions about the value of customer-held knowledge has profound repercussions for how companies innovate as well as the nature of value itself. Some even argue that the very locus of innovation is slowly migrating from within to outside corporate boundaries and that this movement demands a new consideration of questions relating to how firms actively access and deploy the knowledge held by customers.
In the following twelve statements, I develop a logic that concludes in a concise definition of “co-creation” and how firms may derive competitive advantage by facilitating co-created value.
1. Traditionally, customer value has been defined and differentiated by product quality (Features, Attributes and Benefits - the old Kotlerist FAB of 1950-1990s marketing textbooks).
2. Open source product innovation (or “co-production” not co-creation) emphasises the technical co-production of new and improved products, their features and attributes with customer's direct involvement in the idea-generation, concept development stages of the innovation process; it is limited to the design, development and testing of enhanced functional “things”, “objects” or “technologies” with individuals or in communities of users.
3. Increasingly though, value is migrating from products to experiences as customers seek out personalised value to satisfy their situational needs. (Drivers: demand for better experiences, technology enablers, enhanced cognition, new sources of knowledge, increased socialisation, product functional similarity, etc.)
4. Customers are therefore placing increased value on the quality of the experiences they have when they interact with firms and their products (and services).
5. The quality of an experience is determined by how relevant or personalised the experience is for an individual customer; Experience quality is a combination of the functional and emotional elements specific to the situational and temporal context of each customer or context.
6. The locus of value-creation therefore shifts from product quality and design innovation to experience design and quality innovation, or service design.
7. As value-creation is “innovation”, traditional firm-centric innovation processes are becoming distributed in order to provide the means to deliver ongoing, adaptable, personalised, unique experiences for individual customers in unique space – time – event contexts (or “experience environments”).
8. Therefore, the locus of innovation is shifting towards the individual in distributed experience environments.
9. In distributed experience environments, the firm and customers come together to create value; value in the form of personalised unique experiences for customers; knowledge, capability for both and revenues and profits for the firm; the by-product of which is know-what and know-how to continue to deliver and shape that value.
10. Therefore, co-creation defines the processes of distributed value-creation between firms and customers or between customers directly, to create personalised experience value and knowledge, or enhanced cognition defined in the broadest sense and goes beyond “rational inference, know-what and know-how, to include perception, interpretation, value judgments, morality, emotions and feelings” (after Nooteboom’s Cognitive Theory of the Firm, 2009).
11. Markets are therefore forums for the co-creation of personalised experiences; value is differentiated according to the quality and relevance of personalised experiences for customers (as in Prahalad and Ramaswamy, The Future of Competition, 2004).
12. To facilitate co-creation, firms must therefore develop platforms that bear capabilities for the creation and release of heterogeneous, personalised customer experiences or distinctive, unique value. These platforms provide the foundation for deriving competitive advantage arising from enhanced service and experience quality, knowledge capability, and novel learning mechanisms for developing dynamic capabilities for ongoing innovation performance.
OK quick example using John Deere:
Product - an Agricultural machine manufactured by John Deere. Take the STS Series High Octane Combine (http://www.deere.com/servlet/ProdCatProduct?tM=FR&pNbr=9570SH). Farmers "hire" this product to get the job done of "Harvest a Crop". There are a number of functional outcomes that farmers need to get done when harvesting a crop using this Product and by which they "measure" or judge its value-in-use. These outcomes or activities encompass crop collection, separation, yield management, safety, monitoring, equipment cleaning, residue disposal, grain handling etc. etc.
Service - John Deere provides the GreenStar™ Harvest Doc™ system within the Combine. Harvest Doc is a yield mapping system which gathers the yield and moisture information as the farmer uses the combine. The system allows the operator to record yields, moisture, and productivity on the go then store information and download data into their personal computer to create comprehensive yield and moisture maps, along with productivity reports of their fields and operations to better manage inputs and make better management decisions. This is the mechanism that provides knowledge about the farmer's operations to John Deere and also learning for the farmer to improve his/her capability to get the job done better - to derive superior value-in-use. John Deere also offer the Agris agricultural management suite, a system which helps farmers streamline their processes in key functional areas including commodity management, agronomy management, grain processing, accounting & financials, retail sales, and petroleum management.
Experience - the sum of the functional and emotional value derived from the Product and the Service by the farmer.
Posted by: Chris | March 04, 2010 at 10:05 AM
To add to my above post, my perspective is rooted in the knowledge-based view of the firm.
Firms exist because they can integrate and coordinate specialized knowledge held by individuals into collective, organisational knowledge. In turn, that leads to advantage because with all things being equal, knowledge is difficult to copy, is causally ambiguous and typically, beyond the grasp of rivals. When knowledge is valuable and used appropriately, firms can enjoy sustained competitive advantage. In short, firms are better than markets at integrating and applying valuable knowledge to business activity.
As customers also have knowledge, firms that harness their knowledge through Co-Creation mechanisms or Service (as in definitions below) gain advantage. Customers become knowledge-creating actors in the value-creation process for firms and therefore for other customers. Firms that develop and refine Service using their and their customer's knowledge or learning derived from interactions with customers are the firms that are co-creating value.
It is the knowledge / learning mechanisms embodied in the Service between firm and the customer that defines co-creation. These learning mechanisms give birth to new dynamic capabilities (both firm and customer) which lead to the evolution of firms and the evolution of value-in-use - or innovation for customers.
Posted by: Chris | March 04, 2010 at 09:43 AM
Hi Graham
I can make three quick definitions of product, service and experience to add to the above:
- Product: the object, thing or platform provided by a Firm that allows a customer to derive value from its use; or value-in-use. Products are goods which users "hire" or deploy to perform activities and achieve goals, or "jobs-to-be-done"; firms only make value-propositions :-)
- Service: the interactions or processes that exist between the Product, the Firm and the User to derive the value-in-use or to get a job done. Users may interact directly with other users or alone with products without the firm's involvement of course. Such interactions require knowledge, attention, cash, capabilities to perform - or operant resources by both firms and customers. These are the mechanisms of co-created value which are of value to both firm and customer. The firm needs learning from customers to innovate successfully (customer knowledge); the customer needs learning from the firm to derive superior value-in-use.
- Experience: the sum functional and emotional Value-in-use derived from the Product and the Service by the customer. This may include improved know-what, know-how, emotions, feelings, judgments, relationships and functional performance.
Example to follow....
Posted by: Chris | March 04, 2010 at 09:20 AM
Hi Chris
An interesting series of statements leading to an equally interesting conclusion.
But you sweep past a few important questions?
1. What exactly is value? And from whose perspective?
2. Why make the huge leap from product to experience without first considering services, (or 'service' with a service-dominant logic perspective) first
3. And what exactly is an experience anyway?
The questions you ask during the journey ultimately determine the destination you reach.
Graham Hill
Customer-centric Innovator
@grahamhill
Posted by: GrahamHill | March 04, 2010 at 07:37 AM