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Tuesday, 27 July 2010

How to innovate in value co-creation - part 1

I have just finished writing the paper for the Forum on Markets and Marketing - the meeting in Cambridge with Bob Lusch and Steve Vargo entitled 'Value Co-creation in Complex Engineering Service Systems: Conceptual Foundations'. Don't be put off by the word 'engineering' in the title. the paper is intended to integrate the engineering service research and the management service research streams. In the paper, I had 5 propositions and I thought I'll expand on each managerially in my blog because my blog would probably explain it better than a dry academic paper. (and it IS dry - starts with philosophy and ends with engineering design.... enough said). Also, I do think the 5 propositions set the stage for innovation that is value based.

So... on to proposition 1

Proposition 1: A perfect system for the co-creation of use-value makes endogenous all co-creators use-values.

Yikes...where do i start.

If you've been following my blog, you should have read all about co-creation and use value ( and ( You would need to read those to understand this post.

lets say, very simply, a firm is in the business of producing cups. so the CEO will say, what do customers want from cups? lets do market research. needs analysis. requirement analysis. focus groups. dance the di da..

you come up with a spec list.

1. cups should have handles

2. it should hold x ml of fluid

when you brainstorm on the research you realise - wait, some people want hot beverages, some people drink a lot, some people drink very little, some people want it pretty, some people want lids/covers etc. etc. so you go to the marketing department and say - find me the segment of market i should target if I made cup type A, cup type B, cup type C and so on.... and tell me which should be my target market the clever marketing chaps do their rocket science and comes up with ta-da! cup type A would give you £A in revenues, cup type B gives you £B revenues and then you sit down and make a decision on which cup types you can make, how many types and how to make them as efficiently as possible. That was how the world worked.

Marketing folks like to match the type of person with what they buy. so you buy a pretty cup type B and they say - aha... woman age X of this type of behaviour and lifestyle would buy cup type B because they are concerned with selling to you. Actually, I would like many types of cups for many different uses and different contexts. So, mr marketing, my cup-using behavior is actually more important than my myers-briggs score (not that you use it)...also, my cup-using behavior is driven by whom i'm with, what time of the day etc. etc. so .....could you go design and make a multi-context cup please?

firms don't, and i'll try to explain why.

My training now tells me I have to use a mathematical word so forgive me. What that whole process above says is that value has been determined exogenously. This means it's OUTSIDE the use and co-creating system. it means the firm has decided to determine what the value is, make it and then deliver it. it means that when the cup is used by the customer, it can no longer be changed (its exogenous remember?).

but wait. how do i really value my cup? when i take my cup to the garden, i want a lid to keep the bugs away. when it holds water, i want more of it and when it holds expresso, i need less of it. so what I value about my cup is use-value i.e. a cup that understand my context of use which can change but if my use-value is not endogenous to the firm's, how would they even think of designing a cup for my ever changing context?

they don't. instead, it's easier to exogenously determine use-value for many contexts and construct their value propositions around them. so they produce many different cups. of course they go through the whole process of determining value. they call it a 'value-driven approach' (*irony*) and its step one in the lean handbook - 'first determine what the customer values'......(i will blog about about this in the next post)

its the world that has existed because we don't interrogate our assumptions. because its just easier to make different cups to fit different contexts. but by doing it that way, the determination of value will always be exogenous to the use of value and when use-value is co-created, which is contextual. firms are fixated on the idea that one has to come first. so value determination and specification is exogenous to use. So when I co-create value with a cup i.e. use it to drink stuff etc. etc. I am actually co-creating with a value proposition of a firm that have already decided and determined what I wanted from this cup and in what context and I, as user of cup, would then co-create value when I am in the context that has been predetermined... meaning, I make sure I, in my own world and own system 'fit' the cup context that has been predetermined. that is why i buy many cups. because i have many contexts of cup use. and dont even get me started on contextual emotional value-in-use.

but it doesn't have to be like that. especially if you're thinking of innovation. .

why dont firms look at use value as endogenous? because traditional marketing looks at exchange value and choice and once you choose, they aren't really very bothered with the different contexts on how you use the thing (because you paid for it already). So they push the problem (and risk) of contexts to you. Let you decide what your most common context is and let you choose which cup to buy.

but that's a little unfair. in return for my use-value of a cup, i give you, the firm, money. so you get money, i get cup. but my use-value of the cup is limited to the contexts you predetermined whilst your use-value of the money is... oh wait.. infinite in context (don't you just lurrve the acontextual use-value of money? ha ha..). So mr firm, i am actually probably quite happy to give you more money if you could give me greater degrees of contextual freedom of my cup. In fact, we could design a perfect system of co-creation where you give me different cup for every context i might want a cup and I could pay you a lot of money for it. let's just call it a multi-cup carrying butler.

a perfect system for value co-creation is when every co-creator's use value is endogenous in the system. the firm's use value (money, which has use-value across infinite contexts) and your multi-contextual use-value of the thing. It probably is too expensive but hey, a great starting point to think about innovation and its a great way to think about the role of technology. and it's starting to happen as well.

take a good look around you. there are some companies out there who no longer make value exogenous to use. simplest example is the phone. it used to be a phone. to talk, to communicate. today, its not a phone anymore. yes yes they call it a smartphone or somethingphone but it's become a platform onto which you can use it for whatever you need at the context you wish to have. so my iPhone can be a compass at the context where a compass suddenly became necessary. its not just technology driven. its a mindset change in understanding use-value and contextual co-creation in design and delivery - the understanding that value is always use-value within changing contexts and value propositions do not have to be exogenous in the co-creation process.

so where's my smart cup?


  1. Irene,
    Great post...very thought-provoking. A wise man once told me that "money may have use-value across infinite contexts, but there are also plenty of contexts in which the use-value of money falls to zero." Burning Man comes to mind.

    I am not sure, however, if I'm completely sold on whether value is endogenous to the firms that manufacture smartphones (or anything else). Yes, you co-create the value by downloading the apps you want from a very wide selection. However, are firms not simply building ever more flexible platforms on which others can build to enhance their product - think early laptops on steroids? If so, how are they endogenous, since the firms build the platform that are compatible with certain uses (apps) but not others? Are they the equivalent to building a cup to which a number of extensions can be added or modifications made to improve the contextual value proposition? I'm genuinely asking rather than making a point, because I am not sure where I fall on this. Also, you mention that firms are only starting to do this now, but hasn't this happened before? Producers of electricity come to mind. Anyway, good post...I look forward to these so I can prepare purchasing people to be in the mindset of co-creating value with their suppliers (certain ones anyway) in order to drive innovation.

    David Rajakovich

  2. Hello David

    Absolutely agree with you on your first paragraph, oscar wilde's man who knows the price of everything and value of nothing ..

    I dont for a moment suggest that firms who manufacture smartphones go on the basis of value as fact, for the number of product failures, I would suggest the opposite. What I meant to say is that those which are successful are those who (by accident or otherwise) served contextual value. Even as customers, we often aren't even aware our own contextual value. I'm sure you have friends who still ask why do i need a phone on my camera, i have a camera....but its not about the camera, but camera in context - the moment you see something wonderful or important and want to capture it (and your camera is in the house)..smartphones are starting to enable contextual value now, but I don't think any of the manufacturers even know what that is and what is it they do right, or wrong.

    so its really taking a value (outside-in) perspective, rather than a firm's perspective. so adding to the platform is great if there is a contextual need (is there a need for laptop on steroids, contextually? or better extensions to a cup?) that means that 'increase' in performance is taking over more effectively what the customer has been doing or wants to do to make his/her life better, not doing the same thing more powerfully. Hope that helps.


  3. Hi Irene,
    Recently discovered your blog and I would like to congratulate you for bringing such useful insights for discussion. I have been through all of it this afternoon and it has helped me to clarify and rethink some points about value co-creation and service systems, it was great!
    I am attending to the Service Challenge in Cambridge so I hope we will meet there.
    Best Wishes