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.