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Services Marketing vs Service Science

The Transition of Firms to a Service-Dominant Logic using Value Co-Creation through the Customer Experience

Megan Etcheberry, Michael Hanacek, Kan Kimura, Heber Miguel, and Kalia Wormley

AbstractThe purpose of this paper is to define services marketing and service science and their similarities and differences. We point out the continuous weight that is put into services marketing as companies make the shift from goods-dominant logic to service-dominant logic and argue why firms are unable to make that transition. We propose a new model that

managers can use in order to efficiently use service-dominant logic while retaining the benefits of services marketing but excluding the goods-dominant logic.

Keywords: Services, service, services marketing, service science, customer experience, co-creation

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Table of ContentsIntroduction..........................................................................................................................1

The Evolution of Services Marketing..............................................................................1

Goods-Dominant logic vs. Service-Dominant logic....................................................2

Service Ecosystems.........................................................................................................3

Services Marketing..............................................................................................................4

The Customer Experience................................................................................................6

Customer Brand Engagement......................................................................................6The Brand Experience.................................................................................................7

Service Science..................................................................................................................11

The Customer Experience..............................................................................................13

Knowledge (Cognitive).............................................................................................13Affect (Emotional).....................................................................................................13Behavioral..................................................................................................................17

Customer Engagement...................................................................................................17

Internal to the Actor...................................................................................................18External to the Actor..................................................................................................18

Value Co-creation..........................................................................................................19

Service Ecosystems...................................................................................................19Service-for-service exchange.....................................................................................21Value Propositions in a Service Ecosystem...............................................................22Co-Creation in Service Ecosystems...........................................................................22

Framework: The Customer Experience and Co-Creation Model......................................23

Case Studies...................................................................................................................25

Level 0: Communications..........................................................................................26Level 1: Resources.....................................................................................................26Level 2: Relationships...............................................................................................27Level 3: Technology..................................................................................................29

Grading Model...............................................................................................................30

Categories and their Key Factors...............................................................................30

References...........................................................................................................................AAppendix A.........................................................................................................................E

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IntroductionThe Evolution of Services MarketingThe beginning of the services industry started with the idea of consumer behavior.

Consumer behavior is the study of individuals, groups, or organizations and the processes of how they react to certain situations when they face products, services, experiences or ideas. The marketing perspective evolved to business-to-customer (B2C) perspective where a company predicts consumer behavior. The idea originates from cognitive psychology, social psychology, and behavioral decision theory (Cohen and Bernard, 2013). These studies were done in terms of a relationship among people; how a person psychologically and physically react to others. Marketing researchers started to use those studies to predict the behaviors of consumers (Cohen and Bernard, 2013). This new perspective of psychological studies evolved to the study of the relationship B2C. The purpose of services marketing started to study B2C in service industry (Baron et al., 2014).

The idea of services marketing has developed since the mid-late 20th century (Berry and Parasuraman, 1993). As service and services marketing develops, the scope has expanded with the development of service industries. The research history of services and services marketing is in four phases: Phase 1 (>1988), Phase 2 (1988-1997), Phase 3 (1998-2003), and Phase 4 (2004) (Baron, Warnaby, and Hunter-Jones, 2014). These phases mark the shift of thinking from services to service.

Phase 1 developed as the service industry started to have a significant impact on the economy. The main argument of this phase was that services are different from goods; thus, marketing and management are crucial (Berry and Parasuraman, 1993). This phase played an important role in proposing a new perspective that leads to the next phase. In Phase 2, an identifiable sub-discipline, services marketing, emerged (Baron et al., 2014). Researchers conducted empirical research and focused on creating reliable and valid measurements of services marketing (Baron et al., 2014). But the research conducted was for B2C services. Services marketing focused on optimization of a company-related goal, such as profitability, customer loyalty, and competitive advantage (Baron et al., 2014).

Phase 3 used new research directions, the development of self-service systems enabled by technology, the changing role of customers, and a focus on customer-consumer engagements (Baron et al., 2014). This phase coincided with the growth of the World Wide Web. The new technology changed the way companies do business; the internet connects companies and customers around the world. An increase in consumer’s access to technology allowed organizations to offer self-service alternatives to traditional business models (Baron et al., 2014). Although many researchers put a high value on self-service systems, they advocated the importance of customer-consumer engagements. Phase 2 focused on increasing customer experiences, but Phase 3 aimed to engage customers to increase customer experiences. These three phases created a foundation for Phase 4, the beginning of S-D logic (Vargo and Lusch, 2004).

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Goods-Dominant logic vs. Service-Dominant logicThe terms services and service have different meanings in a marketing context. Services

use goods-dominant-logic (G-D logic) and considered either a restricted type of intangible goods or an add-on that increases the good’s value (Vargo and Lusch, 2008). G-D logic is the perspective which focuses on goods which include tangible (goods) and intangible (services) units of outputs (Vargo and Lusch, 2008). In this logic, economic exchange is the production and distribution of units of outputs in which the value’s created by the producer (Vargo and Lusch, 2008). In contrast, service uses service-dominant logic (S-D logic). S-D logic is the application of competencies including knowledge and skills for the benefit of another actor (Vargo and Lusch, 2008). It “views what a firm does, not primarily as the production and offering of tangible goods or, for the matter, any output but rather as the exchange of service that occurs by one actor using its skills and capabilities for the benefit of another actor” (Lusch and Nambisan, 2015).

The different perspectives of services between G-D logic and S-D logic means their view on resources vary. Historically, resources are tangible goods that people can use for their support; they are often natural resources. Those natural resources are ‘operand resources’ (Lusch and Nambisan, 2015). G-D logic sees the value as operand resources. These resources need some actions to make themselves valuable; whereas S-D logic views the value as operant resources which are intangible and can create value (Vargo and Lusch, 2008; Lusch and Nambisan, 2015). The fundamental operant resources are knowledge and technology. People use knowledge to generate other things, technology in service innovation, and they use technology to produce new things or increase efficiency, operations, and productivity. S-D logic has conceptualized definitions of ‘value exchange’ and ‘resources’.

S-D logic is also proposed as a new perspective on value; value is not determined only by organizations, but ‘co-created’ with customers through their experiences (Berry and Parasuraman, 1993). Value occurs only when the firm’s offering is beneficial or helpful to the customer (value-in-use); it's not a firm’s embedding its offerings with value (value-in-exchange) (Lusch and Nambisan, 2015). In a process of creating value, each actor relates with other actors and other resources. The relationship creates the context for each actor to perceive value. That is, each actor experiences value depends on their own context in a value creating process. This is the reason why the firm is not the one who creates value, but proposes value. The recipient creates value. This perspective of value co-creation is a key foundation for S-D logic.

According to IBM researchers, there are two types of views of value creation, value-chain and value constellation (Kieliszewski, Maglio, and Cehkin, 2011). Value-chain “focuses on positioning fixed set of actors and activities along a chain” (Kieliszewski, Maglio, and Cehkin, 2011). The process of a value-creation system is linear and fixed. This means that there is less information, technology, and knowledge shared by companies in the value creation system. This view is characterized by the traditional services marketing where value is co-created but the process is not complex and dynamic. On the other hand, value constellation is more complex and dynamic. Value constellation focuses on the value creation system where the main purpose is to mobilize value creation in new forms and in new ways (Kieliszewski, Maglio, and Cehkin, 2011). The characteristics of value constellation is “continuous design and redesign of complex business systems to connect knowledge and relationships” (Kieliszewski, Maglio,

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and Cehkin, 2011). The traditional services marketing does not capture this value creation system; this view is better explained by the new service science perspective, service ecosystem, which will be explained in the nest section.

G-D logic and S-D logic are the key ideas that many researchers have been arguing in the development of service(s) marketing. The argument of S-D logic is that there are no meaningful differences between services and tangible goods or between service firms and manufacturing firms (Martin, 2012). The advocates of S-D logic claim that service is the application of skills and knowledge for the benefit of another party (Vargo and Lusch, 2008). This means that ‘service’ (singular) is different from ‘services’ (plural) which are outputs and known as G-D logic. The characteristic of S-D logic is that the logic applies to B2B marketing as well as B2C marketing.

Service EcosystemsThe progression of S-D logic beyond the original perspective and framework led an

introduction of a new concept, service ecosystem (Vargo and Lusch, 2012). This new perspective is complex and has a dynamic nature. Also economic factors and social factors influence and are influenced by service exchange (Vargo and Lusch, 2012). Service ecosystem views all social and economic actors as resource integrations and active actors of value co-creation (Vargo and Lusch, 2012). This means that value is co-created through the integration of both existing and new knowledge, and also affected by the social contexts; value is created not only among firms and customers but also across various social organizations (Vargo and Lusch, 2012). Instead of viewing participants of value co-creation as customers and firms, in service ecosystem, the relation between participants is “actor to actor” (Vargo and Lusch, 2012). In this complex service system, value determines the context, not only the evaluation of an individual person, and depends on the ability for each actor to adapt in the social situation (Vargo and Lusch, 2012).

A service ecosystem has a weak-tie among actors compared to traditional service systems where the emphasis is on transaction exchange to various forms of interaction and resource integration (Vargo and Lusch, 2012). In traditional services marketing, value is co-created between a value provider and value recipient and cannot explain the value co-creation process in the service ecosystem. The traditional value of the co-creation process views value as the dyadic relationship between a provider and recipient where other factors might influence the value co-creation; such as social and economic contexts and other actors. Technology and institutions are not considered. In this sense, the co-creation process in service ecosystem is more complex and dynamic than the one in traditional services marketing.

As discussed, there are many perspectives of markets where various players interact. Each perspective views the process in which value is created, the kinds of actors in the value creating system, and the measurements of created valued by actors. When value is co-created by many actors, the co-created value can enhance value experiences, and the enhanced value experiences become competitive advantages for companies. This article includes two research streams: services marketing and service science. Each stream contains two parts, ‘the customer experience’ and the ‘co-creation of value’.

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Services MarketingServices marketing is the traditional way of thinking. Marketing strategies and models

commonly use G-D logic. As the industry shifts from G-D logic to S-D logic, many firms still use services marketing to create their new model. This inhibits firms from transitioning from G-D logic to S-D logic because they end up with the same G-D logic model. Part of the problem is not knowing what services marketing means since the concept of services marketing varies between authors. It ranges from the tangible to intangible, thus giving each concept different meanings. For example, Lovelock is considered one of the pioneers of services marketing. In “Principles of Service Marketing and Management,” Lovelock and Wright describe services marketing as having “service products [that have] intangible performances” (Lovelock and Wright, 2001). After stating this, they then go on to discuss using marketing strategies such as the 4 P’s: product, price, place, and promotion. The keyword in that statement is product, showing G-D logic. Lovelock, Patterson, and Wirtz (2014) published “Services Marketing” where they then stated that services have tangible and intangible elements. It’s important to note that services marketing is not just a service, it is also a product. Gummesson (1987) supports this by stating that "companies are seldom clearly just consumer or industrial or goods or service companies. Their output is both goods and services but in varying proportions." In this paper, we view services marketing as both tangible and intangible using G-D logic. The customer experience makes up the majority of services marketing as it relates to the interaction between the firm and the customer.

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Table 1: Taxonomy of Services Marketing, Customer Brand Engagement, and the Customer Experience

FOCUS AUTHOR KEY POINTSSERVICES MARKETING

Lovelock, Patterson, and Wirtz, 2014

Services have tangible and intangible elements

CUSTOMER BRAND ENGAGEMENT (CBE)

Kumar, Aksoy, Donkers, Venkatesan, Wiesel, and Tillmanns, 2010

Defines CBE as creating deep and meaningful connections between the company and customer

Patterson, Yu, and Ruyter, 2006

Defines the components of the CBE

CUSTOMER EXPERIENCE

Brakus, Schmitt, and Zarantonello, 2009

Defines the brand experience in regards to the three basic systems that are related to brand related stimuli.

Gentile, Spiller, and Noci, 2007

Introduced the concept of consumption and having a holistic experience; shows the relationship as evolving

Uses the three basic systems to show the multi-dimensionality of the experience

Holbrook and Hirschmann, 1982

Created one of the first customer experience models; contains the inputs and outputs between the environment and the customer

LaSalle and Britton, 2003 Re-names customer to actor and uses the holistic approach to describe the interaction between the actor and the company

Nysveen and Pedersen, 2014 Created a model showing direct effects of co-creation on satisfaction and loyalty and indirectly through the three basic systems

Prahalad and Ramaswamy, 2004

Found that by creating “unique” experiences, the customer can co-create with the company

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The Customer ExperienceThe customer experience is key in services marketing. Eighty-five percent of senior

managers no longer believe that the 4 P’s will bring a sustainable competitive advantage (Gentile, Spiller, and Noci, 2007); thus, managers are looking towards differentiating in the customer experience when competing in the market (Shaw and Ivens, 2005). The concept of the customer experience was created in the 1980’s and considered consumers to be rational decision makers (Holbrook and Hirschmann, 1982). Their model, Figure 1 in Appendix A, shows the environmental inputs and customer inputs that create the customer experience. This model has become the foundation for what other models have become today. In the 1990’s, the concept of the customer experience evolved with the concept of consumption and having a holistic experience (Gentile et al., 2007). The holistic approach sees an actor, not a customer, and the interactions between the actor and the company (LaSalle and Britton, 2003). Pine and Gilmore (1999) stated that the customer experience should have “staged” events where the company has control over the experience. But, studies have shown since that it is more than what experience the company creates, but what unique experiences the customer can co-create with the company (Prahalad and Ramaswamy, 2004). This is where the importance of co-creation comes in which will be discussed later.

The customer experience “originates from a set of interactions between a customer and a product, a company, or part of its organization, which provoke a reaction” (LaSalle and Britton, 2003; Shaw and Ivens, 2005). It is also seen as an evolving relationship between the customer and the company (Gentile et al. 2007). The interactions between the actor and the company are what make up the customer experience. Using psychological and behavioral studies show basic systems that an actor would use in the customer experience (Anderson, 1995; Brakus, 2001; Fiske and Taylor, 1991; Goleman, 1995; Schmitt and Simonson, 1997; Tavassoli, 1998). The basic systems are cognition, emotional, and behavioral. These systems are used throughout literature reviews when connecting the person to the customer experience and in regards to co-creation. They also show the multi-dimensionality of the customer experience (Gentile et al., 2007).

Through literature reviews, we have defined the customer experience as containing customer brand engagement, the brand experience, and influences of co-creation. These are important concepts to understand when developing a model or framework for services marketing. Literature reviews have shown that customer brand engagement is the antecedent to the brand experience.

Customer Brand EngagementCustomer brand engagement has various definitions by researchers. Kumar, Aksoy,

Donkers, Venkatesan, Wiesel, and Tillmanns (2010) stated that customer brand engagement is “the creation of a deeper, more meaningful connection between the company and the customer.” This is not involving co-creation, this is about the relationship between the company and the customer. For the customer, it is also “the level of a customer’s cognitive, emotional and behavioral investment in specific brand interactions” (Hollebeek, 2011). Brodie, Ilic, Juric, and Hollebeek (2011) also stated antecedents to customer brand engagement are customer participation and involvement.

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Patterson, Yu, and Ruyter (2006) define the components of customer brand engagement as: absorption, dedication, vigor, and interaction. Absorption is the level of focus a customer has on the object. Nysveen and Pedersen (2014) connect this to the customer’s level of cognition. Dedication is the level of consumer connection to the object. This could be related to the emotional and relational dimension in Figure 2 as shown belowError: Reference source not found (Nysveen and Pedersen, 2014). Vigor and interaction are the level of energy the consumer communicates with the object. These components relate to the relational and behavioral dimensions in Figure 2 (Nysveen and Pedersen, 2014). Sensory and relational are the two experiential components that are not as important to our research. Sensory uses G-D logic as it uses the customers senses in relation to a product. Relational is relationship-based and is also related to the product and the company.

Figure 2: Empirical results including direct affects of co-creation on satisfaction and loyalty

Figure 2 shows the results of a study that where co-creation has a direct effect on satisfaction and loyalty. Satisfaction and loyalty are important because they are attributed with gaining a competitive advantage in the market. Senior managers should find ways to gain customer satisfaction and loyalty; thus, our framework will use these as outputs. This framework is also important because it shows how co-creation through the three basic systems (cognition, affective or emotional, and behavioral) can lead to satisfaction and loyalty. With this logic, we are using the three basic systems in our framework. They also show up in literature reviews and other frameworks that try to describe the brand experience.

The Brand ExperienceThe brand experience is complex but important to understand. Brakus, Schmitt, and

Zarantonello (2009) conceptualizes the experience as ‘subjective, internal consumer responses (sensations, feelings, and cognitions) and behavioral responses evoked by brand related stimuli that are part of a brand’s design and identity, packaging, communications, and environments’.

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They can create ‘unique and valuable experiences’ (Nysveen and Pedersen, 2014). These ‘experiences are the relevant measure of value’ and are the brand (Prahalad and Ramaswamy, 2004). Customers are the only actors that can create value. If they do not perceive that there is value, then it does not exist. Thus, the definition of the brand experience is the environment where value is created by the customer through their interactions with the firm and the service and product.

The environment is where the experience can occur. The brand experience can “occur when consumers search for products, when they shop for them and receive service, and when they consume them” (Arnold, Price and Zinkhan, 2002; Brakus, Schmitt, and Zhang, 2008; Holbrook, 2000). Through these experiences, value is created. They vary by setting by being either indirect or direct. By being direct, they “occur directly when consumers shop buy, and consume products” (Brakus et al., 2009). Indirect could be through a website.

The concept of Brakus et al. (2009) is covered by many literature reviews. It is broken down into several types of experiences: product, shopping, service, and consumption. The product experience occurs when the “consumer interacts with products” (Brakus et al., 2009). This is when the consumer searches and evaluates alternatives (Hoch, 2002). This can be either direct or indirect. The shopping and service experience “occur when a consumer interacts with a store’s physical environment, its personnel, and its policies and practices” (Hui and Bateson, 1991; Kerin, Jain and Howard, 2002). This is what makes a model G-D LOGIC, it relies upon the physical presence of the customer. The consumption experience occurs “when consumers consume and use products” (Brakus et al., 2009). These include hedonic dimensions described by Holbrook and Hirschman (1982) that include feelings, fantasies and fun.

How the Brand Experience differs from other ConstructsBrakus et al. (2009) argue how the brand experience differs from other brand constructs

such as attitudes, motivational, and affective. Attitudes are basic assessments based on beliefs or routine emotional reactions (Fishbein and Ajzen, 1975; Murphy and Zajonc, 1993). Brakus et al. (2009) compare that the brand experience is not general evaluations about the brand, instead they “include specific sensations, feelings, cognitions, and behavioral responses triggered by specific brand-related stimuli.” This means that the brand experience evokes certain behavioral responses by the consumer when they are exposed to brand-related stimuli. These stimuli are “part of a brand’s design and identity, packaging, communications, and environments” (Brakus et al., 2009). These attributes are tangible and describe a product; this is G-D logic. The motivational and affective concepts include involvement, brand attachment, and customer delight. The involvement concept is based off of Zaichkowsky’s study in 1985. It is described as motivating a consumer-based on “needs, values, and interests” (Brakus et al., 2009). The antecedents to this are the perceived importance and personal relevance to the brand (Zaichkowsky, 1985). Brakus et al. (2009) argues that the brand experience is not motivational, that the experiences occur when there is no interest or connection with the brand. Brand attachment is a strong emotional connection between the consumer and the brand (Park and MacInnis, 2006). Brakus et al. (2009) argues that the brand experience is not an emotional relationship, instead it evokes behavioral responses. Brakus et al. (2009) references a study about customer delight as the ‘positive affect’ of customer satisfaction (Oliver, Rust, and Varki, 1997). This again differs from what Brakus et al. (2009) describes the brand experience as since

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its relation is to behavior, not emotion. They state that over time, the brand experience could lead to emotional attachment or customer delight, but it is not directly related.

Frameworks of the Brand ExperienceThere are literature reviews that have used models and frameworks to describe what the

brand experience is and what components create it. The frameworks mentioned are well cited and have concepts that are relevant to S-D logic despite the ties to G-D logic. It is those ties that we want to carry forward into our model.

Gentile et al. (2007) created the customer experience perspective. Adapted from Addis and Holbrook (2001), they created Figure 3 in the Appendix, to show the different types of products: utilitarian, balanced, and hedonic. These products have a combination of consumer value: utilitarian (functional) and hedonic (experiential). These products are more related to services rather than service. But, the model makes a point of showing that there can be a balance of function and experience to create a balanced product. This shows the beginning of S-D logic.

Using Figure 3, Gentile et al. (2007) created Figure 4:4. The model describes how the right environment can contribute to the co-creation of value. The experience has experiential components: sensorial, emotional, cognitive, pragmatic, lifestyle, and relational. The sensorial and pragmatic (usability) components are related to G-D logic. Lifestyle and relational are both behavioral experiential components because they relate to the consumer integrating the service into their lifestyle and using social effects with the services. The model describes the interaction between the consumer and the company. The company gives the value proposition, the consumer then perceives the value from the experience and relates their value expectation back to the company. The company realizes the value from the experience and uses this to create another value proposition. These interactions continue creating a co-creation loop.

This framework is based off of G-D logic as it uses a brand equity (company value) and the utilitarian value (consumer value). It is instead the feedback loop of co-creation that is important and a key element to S-D logic. This feedback loop and the cognitive, emotional, and behavioral (lifestyle, relational) that will carry over to S-D logic.

Figure 4: General Framework

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Another popular framework is Brakus et al. (2009). Their model shows the affects that the brand experience can have in Error: Reference source not found5 below. Brakus et al. (2009) define dimensions of the brand experience as: sensory, affective, intellectual, and behavioral. Two dimensions were later added: a relational (Nysveen, Pedersen, and Skard, 2012) and a social (Dirsehan and Celik, 2011). The sensory dimension is like the sensory component from the customer experience perspective (Gentile et al., 2007) where it refers to the consumer using their senses. The brand uses them to try and make an impression. The affective, or emotional, dimension is where the brand tries to evoke feelings from the consumer. The intellectual, or cognitive, dimension is described by Nysveen and Pedersen (2014) where the ‘degree to which a brand stimulates consumers’ curiosity, thinking and problem solving’. The last dimension is the behavior where the brand tries to get the consumer to physically engage with the brand. The brand experience has shown to have positive influences on brand personality, satisfaction, and loyalty (Brakus et al., 2009; Şahin, Zehir, and Kitapḉi, 2011). Brakus et al. (2009) uses validated scales to measure the dimensions.

This model has similarities to Figure 2 in that it shows connections to satisfaction and loyalty. These connections again involve cognitive (intellectual), emotional (affective), and behavioral components. This validates our logic of connecting the basic systems to satisfaction and loyalty. In this study the connection is not as strong, but through aspects of service science, in “Service Science: Value Co-creation,” the effect will be stronger. Brand personality uses G-D logic; thus, it will not be carried over.

Figure 5: Discriminant and Predictive Validity of the Brand Experience Scale

The brand experience is complex and multidimensional. The frameworks use G-D logic to describe the experience by using products as the objects. To carry these frameworks forward,

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the object must adjust to fit a service and not a good. To be successful, there must be a transition from G-D logic to S-D logic in not only the company, but the frameworks as well.

Service ScienceEvolutions in service science research has produced new literature to help companies

break free from the remnants of good-based manufacturing models. Vargo and Lusch (2004) argued that rather than differentiating services from goods, the focus should be on understanding how they are related. “Manufacturing is a service, and its output is part of the service-provision process” (Vargo and Lusch, 2004). Goods serve as an appliance for the service; thus, emphasis should be on service strategy. “S-D logic emphasizes knowledge and skills (operant resources) as primary resources of economic and social exchange, as opposed to G-D logic, which emphasizes physical resources (operand resources)” (Chandler and Lusch, 2011). Service providers should focus their efforts on understanding their customer base and develop co-creation opportunities. The focus on this section is to outline the key elements that will allow a company to target individual customers and businesses for marketing co-creation opportunities.

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Table 2: Service Science Customer Experience Taxonomy

AUTHORS FOCUS KEY POINTSMAKLAN AND KLAUS (2011); VARGO AND LUSCH (2004);

VARGO AND LUSCH (2005).

Customer Experience

Interactivity, integration, customization, and coproduction.

Process based on collaboration with customers and patterns to create and sustain value.

Move away from G-D logic quality models that have captivated the field.

Knowledge, Affect, Behavioral, and Customer Engagement.

BINDROO, MARIADOSS, AND PILLAI (2012); BRAKUS ET AL. (2009); FIDEL, PILAR, WALESSKA CERVERA (2015); JOHNSON AND GRAYSON (2005); NYSVEEN ET AL., (2014).

Knowledge Dimension concerns the degree to which a brand stimulates customers curiosity, thinking, and problem solving

Blending S-D Logic properties with Customer Knowledge Management (CKM) to increase customer relationships and collaboration opportunities.

Diverse knowledge can be obtained through the network of a firm’s partnerships

Cognitive trust: Customer’s confidence or willingness to rely on a service provider

BRAKUS ET AL. (2009); WALDEN AND JANEVSKA (2014).

Affect Conceptualization, experience, dimensions of brand-related stimuli, and actor engagement lead to emotional experiences.

Firms struggle with understanding and measuring customer emotions

Emotions can be considered as short-cuts that enable decision making

Emotional SignatureCHANDLER AND LUSH (2015); PRESS AND ARNOULD (2011).

Behavioral Firms need a better understanding of customers, building relationships, and documenting consumer influences.

Organizational identification: organizational values with focus on customers and society

Brand: evaluating a particular entity with some degree of favor

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or disfavor. Customer Engagement

The Customer ExperienceS-D logic highlights customers and building long-term relationships with a customer

base. “Interactivity, integration, customization, and coproduction are hallmarks of a service-centered view and its inherent focus on the customer and the relationship” (Vargo and Lusch, 2004). Prior research has examined consumer behavior and the importance of customer experience; but, no comprehensive outline has been constructed in ordinates with a ‘market with’ mentality. This thought process is based on collaboration with the customer and patterns to create and sustain value (Vargo and Lusch, 2005). The first important step is moving away from the G-D logic quality models that have captivated the field (Maklan and Klaus, 2011). As well as mention that management origins of service quality are too limited. The customer experience is unique and involvement can take place at many different levels. Models that are good-centered ignore the importance of the customer’s experience, engagement, and collaboration in the service industry. Three main factors of the customer experience highlighted in the research in both services marketing and service science are: (1) knowledge or cognitive, (2) affect or emotion, and (3) behavioral. The importance of these properties of the customer experience is understanding what they are and how they fit into the service experience.

Knowledge (Cognitive)Customer knowledge is increasing in priority for service providers to manage and

understand. “The intellectual (or cognitive) dimension concerns the degree to which a brand stimulates consumers’ curiosity, thinking and problem solving” (Nysveen and Pedersen, 2014). Customer knowledge management (CKM) is an organization’s capability to help with knowledge creation, preservation, and transfer in customers. Blending customer knowledge management with properties of S-D logic, increase customer relationships and collaboration opportunities (Fidel, Walesska, and Cervera, 2015). “Firms with adequate CKM policies will more likely detect emerging market opportunities than their competitors” (Fidel et al., 2015). Other important factors of CKM are relational and communication. “Research also indicates that diverse knowledge can be garnered from the network of a firm’s partnerships” (Bindroo, Mariadoss, Pallai, 2012). It is a challenging task for organizations to track how stimulus effects customer knowledge. “For example, although colors, shapes, typefaces, and designs usually result in sensory experience, they may also result in…intellectual experiences” (Brakus et al., 2009). Developing CKM infrastructures rooted in S-D logic will help organizations understand customer knowledge development, and how to manage it.

Affect (Emotional)Customer affects are the emotional responses exhibited by customers when faced with

certain stimulus, situations, or experiences. “In line with our conceptualization, the experience dimensions are evoked by brand-related stimuli (e.g., colors, shapes, typefaces, designs, slogans, mascots, brand characters)… [that] may result in emotional…experiences” (Brakus et al., 2009). Firms struggle with this aspect of the customer experience because emotions are difficult to measure and firms lack the strategy to understand customer emotion. “In a complex world, emotions can be considered as short-cuts that enable us to make decisions…although beliefs may

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guide our actions, they are not sufficient to initiate action” (Walden and Janevska, 2014). Table 3 as shown below, outlines five principles of emotion that are relevant to business. It then explains how emotional profiles can be built for customers (Walden and Janevska, 2014).

Table 3: Emotions Importance to Business

S-D logic is “the application of the competencies for the benefit of another” (Vargo and Lusch, 2004; 2008). It is fundamental in developing the concepts of services, services marketing, and service science. Service science is a study of the evolutions, interaction, and co-creation of values with business and technological understanding to explain many types of service systems (Vargo and Akaka, 2009). Service systems are “value co-creation configuration of people, technology, value propositions connecting internal and external service systems, and shared information” (Maglio and Spohrer, 2008). According to Vargo and Akaka (2009), the service systems are the basis for analysis in service science. Service systems are an ‘open system’ which are capable of improving the state of another system and itself through exchanges of resources of each actor. The size of service systems varies from an individual person to a worldwide system (Vargo and Akaka, 2009). The key factor of service science is the exchange and sharing of resources within and among service systems (Vargo and Akaka, 2009). These resources include four types: (1) resources with right, (2) resources as property, (3) physical entities, and (4) socially constructed entities (Vargo and Akaka, 2009). Furthermore, entities exchange competence of four dimensions: information, risk, work, and goods-sharing (Maglio and Spohrer, 2008). In service systems, value cannot be realized by one entity. There are at

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least two entities: the one that proposes the value and the other that realizes the value. This is why the value creation process is called the ‘co-creation of value’.

The managerial value is in understanding how customer emotions influence their customer’s decisions. To help managers with identifying relevant customer emotions, that are driving decisions, creating the Emotional Signature tool. Figure 6 as seen below, show how business can classify customer emotions and the affect they could have on business value (Walden and Janevska, 2014). It also demonstrates how customers react to stimulus, develop a response-based on internal and external factors, and this leads to a documentable affect.

Figure 6: Emotion Scale and Three-Stroke Emotional Signature Model

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With this information emotional signature tools use statistical analysis to develop easy to read summary tables and charts. Emotional signature information will give companies stronger information to help devolve strategy. It will also help organizations with communication to certain customer segments. Emotional signatures could also allow organizations to better document customer behavior and develop strategies to better control consumer behavior in the long-term.

BehavioralConsumer behavior research focuses at better understanding customers, building

relationships, and documenting how consumers are influenced. Important research for the customer experience and the goals of building long-term relationships is organizational identification. In the past, “organizational identification has been discussed primarily as a cognitive construct, focusing on the perception of unity between the self and the organization” (Press and Arnould, 2011). Positive Identification is formed through strong customer engagement, as customers connect with preferred organizational values and benefits (Press and Arnould, 2011). In order for the development of long-lasting relationships with customers to continue, organizations need to understand the shift in value. Customers can be seen shifting from traditional tangible cost-benefits to placing more focus on possible intangible benefits. This builds strength for organizations to begin “implementing socially responsible business models” (Harmon, Demirkan, and Raffo, 2012). This allows consumers to identify with a service provider dependent on intangible value and benefits. Customers connecting themselves with an organization allows for increased communication and co-creation opportunities.

Brand is an important factor for consumer behavior. Consumers judge brands daily and often show “a psychological tendency expressed by evaluating a particular entity with some degree of favor or disfavor” (Chandler and Lusch, 2015). This evaluation has a strong connection with brand and is another reason why organizations need strong image and customer communication.

Customer EngagementA part of behavioral actions is a customer’s engagement to a brand or organization. It is

important that mangers understand how important it is to understand customers and to have an effective communication ecosystem to facilitate co-creation. “Customer engagement reflects a psychological state, which occurs by virtue of interactive customer experiences within a specific service relationship” (Chandler and Lusch, 2015). But, as mentioned before, this can happen at many different levels. “Each and every experience occurs in a specific time and place, the connections surrounding the experience contribute to the framing of a psychological state or disposition” (Chandler and Lusch, 2015). The five properties of engagement outlined by (Chandler and Lusch, 2015) can be found below in Table 4. Two of the five properties are external to the actor: external connections that occur in relational space (relational) and over time (temporal). The last three properties are internal to the actor: future disposition, past disposition, and present disposition.

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Table 4: Five Properties of Engagement

Internal to the ActorThe importance of temporal connections is understanding how it is oriented toward future

service experiences. “Temporal Connections refer to connections stemming from service experiences in the past and giving rise to service experiences in the future” (Chandler and Lusch, 2015). This builds strength for increasing efforts to develop long lasting relationships with customers. This is because of present connection, hoping to further positive future connections are affected by past.

Relational connections is when the actor’s current role at the time of the experience is dependent on the social roles that affiliate them with other actors. These connections continue to evolve and an actor may take on different social roles (i.e. parent, student, friend etc.) based on a given service experience Chandler and Lusch, 2015). This means that “relational connections are conduits by which actors may influence one another” (Chandler and Lusch, 2015). It is important for service provider to understand that customers encompass many different social roles, and should work to understand and meet a majority of the roles an actor may encompass.

External to the ActorFuture disposition is when the actors have many different connects and experiences from

one another. This leads to different ideas and actions about desired future outcomes. “Future disposition is how actors appropriate, reproduce, or potentially innovate on connections as resources for moving toward a specific future” (Chandler and Lusch, 2015). Organizations should also view customer connections as resources. Both parties can enjoy resources that each side could not produce on their own. This develops opportunities for service providers to work with their customer base to create value, rather than just focus on the exchange of money for service provisions.

When actors remember past events and have different perspectives of attitude or judgments of an organization or brand, it is called past disposition. “Engagement is based on an

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actor’s appropriation, renovation, or innovation of connections in response to a specific past” (Chandler and Lusch, 2015). Past events can contain strong affective and cognitive responses, so it is important for organizations to have an understanding of negative or positive past customer dispositions. Then develop leverage strategies to strengthen positive connects or remedy negative connects.

Present disposition is the actor’s present space between past and future dispositions. Meaning that a current experience is what ties both past and future to current connects. “In this way, meaning making can facilitate service experiences by continually refocusing and aligning past and future dispositions in an actor’s current connections” (Chandler and Lusch, 2015). Organizations must place resources in aligning past experiences and future expectations to develop a loyal customer base. This will require an organizational environmental change in how customers are included into the service experience as a whole.

With a stronger understand of the customer experience and the process of building relationships, organizations can transition to an S-D logic focused model. The importance of data analytics in connection with the customer experience is advancing to a new form of communication and marketing. The ability to target individual customers through emotional signatures and data analytic tools will become far superior marketing method when compared to traditional demographics and segmentation. Developing IT infrastructure and big data analytics with the new customer experience focus outlined in this section, will lead to a competitive advantage and advancements in the field. But, organizations also need a strong understanding of co-creation in a service eco-system to achieve this end.

Value Co-creationValue co-creation extends beyond the dyadic, customer-supplier perspective to a multi-

level approach where many stakeholders, or “actors,” interact within a service ecosystem. Within these ecosystems, value is proposed, evaluated, and accepted because of institutions, resource integration, and technology. Since each actor has access to different resources, evaluations may differ depending on their unique context.

Service science widens the scope of value co-creation and how it influences the actions and interactions of individual actors by taking a service ecosystem approach that centers on resource integration. As explained earlier, service science shifts the basis for all exchange from “services” as intangible outputs, to “service” as the application of operant resources. This emphasizes the process rather than output. Service science also recognizes that the interactions among actors influence and are influenced by social structure and context.

Service EcosystemsA service ecosystem is a multi-level network of reoccurring interactions between

interdependent social and economic actors. Instead of viewing it as a dyadic relationship between B2C and B2B, it represents a constellation of interactions between A2A (actor-to-actor) (Vargo and Lusch, 2004). Since no one actor has all the resources needed to operate, they must take part in resource integration processes to maintain meaningful relationships through economic and social exchange (Frow, McColl-Kennedy, Hilton, Davidson, Payne, and Brozovic, 2014). These exchanges result in an on-going re-evaluation of experience that create a dynamic, self-contained, and self-adjusting ‘system-of-systems’ (Frow et al., 2014). This is not to say that

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B2C and B2B interactions are separate from the service ecosystem, but rather nested within a broader level of institutions. These institutions, along with technology and resource integration, make up the structure of a service ecosystem in three levels: micro, meso, and macro.

At the micro level, producer and consumer interactions are central (Frow et al., 2014). These are the B2C interactions. At this level, ‘value’ is a singular term for individual evaluation of experience of a market offering (Vargo and Lusch, 2004). The goal is to exchange services to improve each actor’s well-being. The micro level is the base of the service ecosystem and is influenced and has an influence on the meso and macro levels.

At the meso level, firms, customer networks, and institutions are central (Frow et al., 2014). These can be viewed as B2B interactions. At this level, ‘values’ is a plural term representing social norms that influence the evaluation of an experience (Frow et al., 2014). Although any actor may interact with the focal firm, value propositions operating between employees and suppliers are the most important because they connect with the focal firm and have many opportunities for knowledge sharing.

At the macro level, networks of institutions, or markets, are central. These are the A2A interaction where “values” are not co-created at one time. Actors evaluate experience-based on past experience, present encounters, and anticipated interactions (Frow et al., 2014). At this level, the success of an organization is determined by the ability to interact within a broad range of market relationships characterized by complexity, non-linear, and systemic interdependencies (Frow et al., 2014).

Figure 7: Structuration in Service (Eco)Systems

Institutions As previously discussed, service ecosystems are complex and influenced by social

structures and institutions as shown above in Figure 7. The social structure is made up of consumer culture that influences the experience, which is ‘value-in-context’. Experiences at micro, meso, and macro levels all involve interactions among various actor’s that contribute to

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the co-creation of value and co-construction of markets (Vargo and Lusch, 2011). Social structure is also made up of ‘signs and symbols’ influenced by lived experiences of actors. As Venkatesh, Penaloza, and Firat (2006) stated, “what is more important than skills and knowledge, or products and services, are the meanings and values underlying these two sets or levels of market symbols, which together constitute the micro elements of the world.” These symbols influence and are influenced by the meso and micro level; but, a consumers’ social structure will influence their interpretation of a proposition, in turn changing the meaning or value for that particular consumer. Since the viewpoint determines value, what is valuable for one actor in a particular context may not be the same for another actor in the same context or the same actor and different context (Gronroos, 2011). When considering co-creation, signs and symbols of social structure, as well as lived cultures and access to resources all play a role in the interpretation of propositions or value.

Value is dependent on the particular perspective and specific context of an actor such as time, place, or social setting, which is ‘value-in-context’. Depending on the access to particular resources in a particular context, value is determined by the improvement of a systems well-being. This can be measured as “a system’s adaptiveness or ability to fit in its environment” (Vargo and Akaka, 2012).

Resource Integration  Value co-creation is through mutual beneficial interactions within and among service

systems, as they integrate and apply resources and exchange service for service (Vargo and Lusch, 2012). Since value is not only created between the customer and firm, but among various actors in the service ecosystem, value co-creation depends on the availability of resources as well as the relationships associated with each service system (Akaka and Chandler, 2011).

TechnologyTechnology acts as a duality in the service ecosystem being both operant and operand

resources. Technology can be a product of human action, an operand resource, but can also be a medium of human action, an operant resource (Vargo and Akaka, 2012). Although institutions guide the development and use of technologies, they are also influenced by the development and use of technology.

Service-for-service exchangeUsing the increased scope of S-D logic of ecosystems, service is the basis of exchange.

At a meso and macro level, service systems are maintained through individual actors co-creating value for themselves, others, and the value all interactions (Vargo and Akaka, 2012). These interactions will improve a system as well as their ability to fit in the environment. It is the result of applying operant resources through operand resources that result in a competitive advantage (Vargo and Lusch, 2004).

Value is value-in-exchange, value-in-use, and value-in- context. Value-in-exchange is nominal and takes place at the micro level. It is a good-dominant approach that focuses on one exchange or interaction. In this view, there are traditional roles of ‘producers’ and ‘consumers’ who exchange operand resources such as goods and money (Vargo and Lusch, 2004). ‘Value-in-use’ is the integration or application of resources at the meso level. This represents a service-

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dominant approach (S-D) of co-creation. In this view, value is always co-created through the interactions among various actors and integration of many resources. Thus, the relationship blurs the lines between provider and consumer. Although the process of co-creation of value is driven by “value-in-use”, it is mediated and monitored by “value-in-exchange” (Vargo and Lusch, 2004). “Value-in-exchange” focuses on the collaboration of institutions, which can be individuals or groups of individuals that adapt through the exchange of operant resources. These institutions are systems-of-systems that exchange resources to enhance, adapt, and survive in their social context (Vargo and Lusch, 2004). “Value-in-context” is the value through use that is influenced by social context such as time, place, and society, as well as access to other resources. This takes place at the macro level where there is a cultural aspect to value. The interaction among actors will influence the evaluation of another based on the context. Actors are interdependent-based on the resources they need from one another to survive. This drives service-for-service exchange and resource integration to provide mutual beneficial values (Vargo and Lusch, 2004). Value(s) at the micro, meso, and macro level is not created, it is proposed and other actors realize value through evaluation of experience and integration or application of resource or proposition.

Value Propositions in a Service EcosystemValue propositions in a service system consider roles within a service system that are not

generally viewed as a stakeholder (Frow et al., 2014). This transition from micro level focal actors, to meso level stakeholder systems, to macro level service ecosystems reflects the dynamic aspects of ecosystems. Value propositions are “a statement that represents the core strategy and describes the distinctive competitive advantage of a firm” (Frow et al., 2014). It’s how a service provider uses their resources to achieve the most beneficial outcome that supports the well-being of the ecosystem. To do this, a service provider proposes value depending on their operant resources, such as skills and knowledge, and the value proposition is either accepted, rejected, or unnoticed by other actors based on their evaluation of the proposition (Vargo and Lusch, 2004). Since an actor’s context determines their evaluation of a proposition, a provider does not customize offerings, but enables customers to customize their own resources and needs. An accepted value proposition has a reciprocal exchange of knowledge between resource-integrating actors to shape the resource integration within the system (Frow et al., 2014). This means that the resource offering of each actor has implications for the offerings of another since all relationships are interdependent. When the most attractive value proposition accepted, the highest performance will need constant revision from customer changes in order for the advantage to be maintained (Frow et al., 2014). Thus, the ecosystem is dynamic and always changing. Value propositions operate within each of the levels of the ecosystem, between the levels, and also serve to shape the levels.

Co-Creation in Service EcosystemsTaking the S-D logic approach to service ecosystems, we see that institutions not only

guide, but are also guided by the interactions among many actors at the micro, meso, and macro levels. These interactions determine the evolution of each actor’s experience; meaning value differs depending on the multiplicity of shared institutions, and availability and access of resources (Akaka and Chandler, 2011)

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In an S-D view, value is co-created as service, the application of knowledge and skill, as the basis of exchange by focusing on the experiential view of value (Vargo and Lusch, 2004). With the introduction of service ecosystems, value co-creation focuses on the participation of many stakeholders and is influenced by institutions and social structures within the system (Archpru et al., 2015). All stakeholders, or ‘actors’, are interdependent for service-to-service exchange and have reoccurring interactions-based on value propositions. Although an actor can provide a proposition, it takes the evaluation and acceptance of another actor to realize the value. Whether the resource is valuable depends on shared social structures, or context, that influence and guide the evaluation (Archpru et al., 2015). Figure 8 below represents how value is co-created among service systems.

Figure 8: Value Co-creation among Service Systems

Co-creation of value occurs through many levels of interaction which all influence the determination of value or evaluation of experience. Managers need to be aware of social and cultural contexts that influence evaluations of experience and be able to respond to change.

Research Questions What factors are included in an S-D logic transition model? What factors are important for managers to understand in order to transition to S-D logic?

Framework: The Customer Experience and Co-Creation ModelDue to the rapid change in technology over the past few decades, our society has

transformed and become more digitalized and interconnected. The Internet has connected people from all across the globe that weren’t connected before. Also many developing economies offer cost-efficient labor and production of physical goods, which has spurred the growth of manufacturing in those economies. This has created a problem for many manufacturing industries in developed countries, since many of these developed economies have minimum wage laws they must adhere to, worker unions they must work with, and other regulatory expenses developing economies don’t have to deal with. To compete with the world, manufacturing companies in developed countries are seeking to add services to their product

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with the purpose of gaining a competitive advantage and increasing customer satisfaction and loyalty. In recent years the trend towards services has progressed and gained traction in many developed countries. Although the validity of the preceding statement is accurate, services still have a ways to go before they become as productive as the manufacturing sector. This is a concern not only for companies within manufacturing, but also the economic growth of these developed countries. The economic concept known at Baumol’s cost disease states, “a rise of salaries in jobs that have experienced no increase of labor productivity in response to rising salaries in other jobs which did experience such labor productivity growth.” IBM one of our case study company has created a new discipline known as Service Science Management and Engineering (SSME) also referred to as Service Sciences to make services more efficient.

In Figure 9 below, the model includes the transition phases between G-D logic and S-D logic. The four transition phases created within our model are the following: Level 0: Communications, Level 1: Resources, Level 2: Relationships, and Level 3: Technology. Within the communication level, the company has no or minimum internal or external communication structure in place, external resources, and the state of their current technology can improve. In the first level, ‘Resources’, is defined as the integration of all resources which means employees and other stakeholders have access to the company’s resources. Also companies have partial IT infrastructure. The second level, ‘Relationships’, is when the company has constant relationship with other actors. This relationship comes in the form of sharing knowledge, skills, and technology. The third level is the technology phase, which means there is a completed technology infrastructure within the company. This includes having a sophisticated supply chain as well as understanding and having access to big data. In this part of the paper we will analyze how the case companies fit into this spectrum. In essence, this spectrum or represents the transition from G-D logic companies to S-D logic. Furthermore, we’ll use a grading model to grade each company and determine how they are performing in the transition from G-D logic to S-D logic.

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Figure 9: Customer Experience & Co-Creation Model

Case StudiesThe companies we have chosen for our case studies are IBM, Cisco Systems and

Starbucks Coffee. The reason we chose the preceding companies for our case study is that these companies exemplify service sciences and services marketing. IBM and Cisco Systems are the forerunners of service science alongside other American and European universities. Although there is no consensus on the definition of service science, from the research conducted the definition that best defines service science is that from Paul Horn. Paul Horn, the head of IBM Research, states that “service science is the interdisciplinary application of science, engineering, and management for the purpose of improving services.” Service science also contributes to systematic innovation and improved productivity. It is the guiding force for the improvement of services through improved predictability in the productivity, quality, performance, compliance, development, reusability of knowledge, and operational innovation in services (Tagg, 2009). In contrast, Starbucks uses G-D logic and has exemplified an excellent customer experience throughout the company’s history. Starbucks CEO states, “While we are a coffee company at heart, Starbucks provides much more than the best cup of coffee- we offer a community gathering place where people come together to connect and discover new things. Starbucks

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represents something beyond a cup of coffee” (Gallaugher and Ransotham, 2010). We also test the three companies against our model.

Level 0: CommunicationsThe communications phase is the lack of communication infrastructure in place to

support co-creation. Furthermore, the company has no to minimal use of IT connectedness and data analytics or use of external resources. Our case study companies all seemed to have met these criteria. The validity of the preceding statement supports the findings found while researching IBM, Cisco Systems, and Starbucks. All our case companies have demonstrated they have an infrastructure in place to support co-creation. In the following paragraphs we’ll explain how these structures work in correspondents to the other levels.

Level 1: ResourcesThe Resources level of our model is when the company shows resources integration.

Furthermore, there is an increased access to resources and partial IT infrastructure. There is also the development of some co-creation functions.

According to our model, Starbucks Coffee is in the transition between level 1, and level 2. Further analyzing our model in the customer experience component could confirm the preceding statement. The customer experience component in level 2 is superior to the other levels. Furthermore, customer engagement is high and the company gets a grasp on their consumer’s behavior. Starbucks Coffee was built upon the foundation of customer experience. They have excelled as a company and it has been evident throughout the company’s history. This was most evident in 2008 when the company faced competition from Dunkin’ Donuts, McDonald's, Peet’s Coffee and Caribou Coffee. All these competitors had enacted the customer experience Starbucks first pioneered. After having a declining business in 2008, Howard Schultz returned as CEO of Starbucks. He noticed that the customer experience in Starbucks was becoming stagnant. In the previous section, “Services Marketing,” the customer experience “originates from a set of interactions between a customer and a product, a company, or part of its organization, which provoke a reaction” (LaSalle and Britton, 2003; Shaw and Ivens, 2005). It is also seen as an evolving relationship between the customer and the company (Gentile et al. 2007). The interactions between the actor and the company are what make up the customer experience. This was what Starbucks wanted to evolve to during these tough times. To remain competitive, Howard Schultz launched a new way of improving the company's customer experience. Mystarbucksideas.com initiative was an effort to join with the consumer and co-create. This new initiative allowed consumers to help co-create the future of Starbucks with their own ideas. The website had different categories where consumers could build and/or contribute to discussion threads. Starbucks would chose ideas to initiate. According to Starbucks, “In the first year alone, more than 65,000 ideas and 658,000 votes were cast. In late 2009, the company announced that fifty distinct ideas were drawn from the site had been approved, including health food options as a major initiative for the company” (Gallaugher and Ransotham, 2010).

Also, Starbucks created a communication platform to communicate with various stakeholders. An example of such platform is the Small Farmer Support Initiative. It is a joint engagement platform with the Fairtrade Foundation. This allows Starbucks to stay involved in dialogue with farmers in Latin America and east Africa.

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Currently, one of the biggest problems within the service sector is the productivity of people. The reason behind this is the service sector relies on the intuition, knowledge, and experience of employees. To increase the productivity and efficiency of the service sector, IBM created a new type of employee known as ‘T-shaped’ people. According to IBM, ‘T-shaped’ people are excellent communicators with real world experience and deep (or specialized) in at least one culture, one discipline and one system area. They have good teamwork skills interacting with others who are deep in other cultures, disciplines and system areas. Furthermore, ‘T-shaped’ professionals are entrepreneurs and innovators by heart; they help create new technologies, businesses, and societal innovations. When it comes to the realm of rapid innovation, ‘T-shaped’ professionals are more equipped to become successful in changing environments than ‘I-shaped’ people, who lack the breath. IBM looks for individuals that show both breadth and depth. Service science looks to investigate these elements through the use of existing academic disciplines to raise productivity.

Level 2: RelationshipsThe Relationship Phase of our model is defined as the company having a relationship

between various actors. This relationship is based on sharing and transferring of knowledge, skills, and technology. Also, the company shows an increased development of IT infrastructure and use of data analytics. The company understands the customer experience and development of targeted engagement marketing strategies.

The companies the best exemplify the relationship phase are IBM and Cisco Systems. Both IBM and Cisco have integrated and implemented their relationships between differing actors. The following examples state how they have done this. Sam Palmisano, IBM’s former CEO, envisioned global collaboration. Palmisano stated that the view of the future is centered on humans living on earth, and how the interaction can generate new opportunities for IBM and for its clients (Tagg, 2009). In a fast changing and innovative world, there needs to be openness and transparency in all parts of a company. Different minds, perspectives and skills brought together to find new solutions to long-standing problems in our society. This is the approach IBM took with the creation of global collaboration. John Chambers, CEO of Cisco Systems, states that “collaboration will affect every industry. It will change service, sales, and business models. It will change the size, scope, and the number of projects an organization can take on. And it will change the speed of implementation” (Ramaswamy, 2010). This new type of co-creation is the ‘human network’. The concept of improving relationships among stakeholders has been in business for many decades. An example of attempting to build more trusting relationships with stakeholders of the company is the Japanese-style participative management concept; creating partnerships with suppliers. Furthermore, it introduced new concepts to business such as quality cycles, lean production, and six sigma. The introduction of co-creation has ameliorated the concept of improving relations among stakeholders.

Furthermore, IBM created Innovation Jams to co-create with government officials, educational institutions, clients, partners, suppliers, and other stakeholders. In essence, Innovation Jam brings together 150,000 IBM employees, stakeholders, and vendors. They participate in two to three days of online events that foster innovation through co-creation with the purpose of helping IBM bring products to the market faster. They also are creating new

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opportunities through massive co-creation of ideas which is creating a global democracy business. The name Innovation Jam was derived from the notion of a jam session. In a jam session, a jazz musician who is passionate about music connects with others to create something new. This is innovation. People from all across the globe, who have technical and business expertise, can collaborate to innovate a new service that can help the world, those in need, or create new business opportunities. The Innovation Jam in 2006 was the largest IBM online brainstorming session held and had more than 150,000 people from 104 countries and 67 companies. The result of the 2006 Innovation Jam was the launch of ten new IBM businesses. In addition, the new businesses were funded with seed investment totaling to $100 million. The Innovation Jams also has a reputation of collaborating with non-profit organizations. These include NATO, USAID and the World Urban Forum. They co-create solutions to various challenges such as urban poverty and international security.

IBM has a history of moving closer and closer to the concept of co-creation. In 1995, the Industry Solution Labs were introduced to play a role in taking IBM employees from the labs to client sites. They could see their scientific discovery and progress meet commercialization. The Global Technology Outlook (GTO) was created in an effort to facilitate one-on-one interview, focused on co-creation. These meetings involve a wide-range of global leaders from academia, business, and government to discuss the topic of their interest. These discussions are then turned into reports and given to executives around the world for new insights on how the world is changing. The participants of the GTO are selected for their expertise, accomplishments and influence.

Another program IBM has to further spur co-creation is Innovation Discovery. It provides a platform for IBM to have co-creative conversations with its clients. Like the program mentioned in the preceding statement, Innovation Discovery brings together the brightest minds from IBM’s network and the client’s internal organization. IBM states by concentrating the focus on what your company and IBM can do together, Innovation Discovery accelerates the process of identifying new areas for growth and achievement. The way Innovation Discovery works is that IBM selects participants such as IBM fellow, distinguished engineers, senior researchers, industry leaders, and experts from various fields that are tailored toward the client’s needs. The IBM participants are then combined with 5-7 executives from the client's company that range from different part of the company such as innovation, technology function, marketing, information technology, and other customer-facing functions. These meetings are both virtual and face-to-face collaborations to co-create new insights, innovations, technologies, business models, business units, and breakthrough service.

An example as described in The Power of Co-Creation: Build It with Them to Boost Growth, Productivity, and Profits by Venkat Ramaswamy and Francis Gouillart explain the relationship between IBM and Royal Dutch Shell. The purpose of Innovation Discovery was to drive innovation by using each company’s resources, expertise, and experiences. The relationship IBM has with Royal Dutch Shell is that IBM provides key IT applications to Shell. The traditional client-supplier relationship between IBM and Royal Dutch Shell had to evolve to stay competitive and innovative. This was done was by creating a new framework for collaboration that included the following: types of collaboration, requirements, commitments, and outcomes. With regards to collaboration, the main question that has to be answered is: what

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challenges are appropriate for collaborative research? The requirement component of the new framework involved discussing the investment and resources needed for collaboration. Another important component is commitment in the form of time and focus given to each project. The last component of the new framework is outcomes which revolves around terms of IP ownership, commercialization, and joint go-to-market strategies and plans. This new type of collaboration has further pushed the importance of co-creation in all aspects of business. This approach works best when there is no solution to an existing challenge or the solution lacks key technology capabilities. In the case of IBM, the company is well known for their expertise in computer modeling, analytics, and computer simulations. Furthermore, Shell is well known for their expertise in subsurface and reservoir engineering (Ramaswamy and Gouillart, 2010). Thus, the new collaboration or form of co-creation benefits both companies and ensures they maintain a competitive advantage.

Level 3: Technology The Technology Phase of our model has the company with a completed IT infrastructure.

They use big data and data analysis to develop individual customer profiles. In addition, a Customer Knowledge Management department is established to facilitate communication and documentation of customers. Their marketing and communication strategies are developed on individual customer profiles, instead of demographics and segmentation strategies.

The companies that show plans towards moving in this direction or both IBM and Cisco. Although this is true, it will not be realized until 2025-2035 due to the pace technology is currently developing. IBM has introduced The Smarter City initiative which will be the foundation for level 3. Within the Smarter City initiative, IBM looks to interconnect and digitize the following sectors: health care, education, traffic, airports, rail, energy and utilities, social services, public safety, retail, communications, and economic development. Cities are competing with each other to attract more work talent, residents, businesses, and visitors. This means that cities have to be efficient and to their highest quality. In other words, customer experience is detrimental to the success of these cities. Thus, IBM is attempting to use big data and data analysis to increase the quality of customer experience in these cities. They’ll use co-creation and collaboration methods to implement their ideas and technology. Furthermore, Cisco plans to transform Urban Services by unifying the infrastructure and delivering new citizen services. One way they are doing this is by providing City Wi-Fi that will connect people and objects. All these innovations are leading to our last stage of transitioning from a G-D logic company to S-D logic. These innovations will allow these companies to develop individual customer profiles for their marketing and communication strategies. Firms are transition from demographic and segmentation strategies to marketing based on individual customer profiles. Also, the development of IBM’s Watson will help with big data and data analysis when the time comes.

Grading ModelWe based our grading model off the transition phases developed in our model. The

scoring card allows companies to know where they are in the transition between G-D logic and S-D logic. Table 5 below shows the grade range from ‘A’ to ‘F’. An ‘A’ means a company uses S-D logic. ‘B’ or ‘B-’ means the company is in a transition from G-D logic to S-D logic. A ‘C’,

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‘C-’, or ‘D+’ means the company is currently at a hybrid state. ‘D’, ‘D-’, or ‘F’ signifies the company is still a G-D logic company. We have graded the following case companies to determine where they are at with regards to the transition between a G-D logic to an S-D logic company. Our findings are backed by the research we have done earlier and thus each score is based on the research we have accumulated with regards to these companies.

Table 5: Grade Definitions

Grade on Transition from G-D Logic to S-D LogicGrade Definition

A S-D Logic companyA- Medium steps towards S-D LogicB+ Beginning steps towards S-D LogicB Transition B- Transition C+ Transition C Hybrid C- Hybrid D+ Hybrid D G-D LogicD- G-D LogicF G-D Logic

Categories and their Key FactorsCommunicationThere are several key factors that are part of this category. Is there a communication

infrastructure in place to support co-creation? Is there and absence or minimal use of IT connectivity and data analytics? Do they use external resources? A high score means the company is doing well with respects to this category. A low score means the company can improve in this category.

ResourcesThe key factors for this category are: Are resources integrated? Is there an increased

access to resources? Is a partial IT infrastructure evident within the company? Is there a development of some co-creation functions? A high score means the company is doing well with respects to this category. A low score means the company can improve in this category.

RelationshipsIs there sharing of knowledge, skills, and technology? Is there an increase development

of IT infrastructure and of data analytics? Does the company understand customer experience and the development of targeted engagement marketing strategies? High score means the company is doing well with respects to this category. A low score means the company can improve in this category.

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TechnologyLastly, the key factors for technology are: Is there a completed IT infrastructure in place?

Is the company using big data and data analysis for the development of individual customer profiles? Is a Customer Knowledge Management department in place to facilitate communication and documentation of customers? Are marketing and communication strategies developed based on individual customer profiles, instead of demographic and segmentation strategies? A high score means the company is doing well with respects to this category. A low score means the company can improve in this category.

Table 6: IBM Grading Model: IBM Receives a B+ with a score of 87.25%

Company Name: IBMDate: May-15

Category Score Weight Weighted ScoreCommunication 100% 0.25 25%Resources 99% 0.25 25%Relationships 95% 0.25 24%Technology 55% 0.25 14%Total 1.00 87%

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Table 7: Cisco Systems Grading Model - Cisco Receives a B+ with a final score of 88.50%

Company Name: CISCO SYSTEMS

Date: May-15

CategoryScore

Weight

Weighted Score

Communication 100% 0.25 25%

Resources 100% 0.25 25%

Relationships 99% 0.25 25%

Technology 55% 0.25 14%

Total 1.00 89%

Table 8: Starbucks Grading Model - Starbucks Receives a D+ with a final score of 67.50%

Company Name: STARBUCKS COFFEE

Date: May-15Category Score Weight Weighted ScoreCommunication 100% 0.25 25%Resources 70% 0.25 18%Relationships 75% 0.25 19%Technology 25% 0.25 6%Total 1.00 68%

Managerial ImplicationsIt is important for managers to first recognize the differences between G-D logic and S-D

logic. Only at this point can management evaluate their business model, through an S-D logic lens. Service systems are “value co-creation configuration of people, technology, value propositions connecting internal and external service systems, and shared information” (Maglio and Spohrer, 2008). Pure S-D logic transition requires a few factors: (1) Resource integration, (2) Relationship development and understanding of A2A communication, (3) Sharing & use of knowledge, skills, and technology (operant resources) in co-creation processes, (4) Organizational eco-system developed with a focus on customer and societal value, (5) Organizations ability to operate in a service ecosystem, and (6) Big data and data analysis used to develop individual customer profiles to help drive customized marketing strategies. Through

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the use of the conceptual framework and grading scale constructed in this paper, organizations can take the first steps to evaluating current business models, and begin the transition to a service-dominant organization.

A

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Appendix A

Figure 1: Contrasts between the Information-Processing and Experiential Views of Consumer Behavior

Referenced on page 1.

Figure 3: Hedonic, Utilitarian, and Balanced Products

Referenced on page 4.