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Purpose – The purpose of this paper is to present a visualisation of the firm's offering from a service‐dominant logic (S‐DLogic) perspective. The case of Rolls‐Royce is presented as an avenue through which to explore an alternative view of the firm's value proposition, a visualisation informed by S‐DLogic that could aid organisations in their transition from goods‐dominant logic (G‐DLogic) to S‐DLogic. Design/methodology/approach – Through integration of an operations management approach in process mapping and design and simulation with choice modelling in business‐to‐business marketing, this paper operationalises some of the key aspects of S‐DLogic, most notably focusing on the constructs of value and resources. This is explored through a single case; Rolls‐Royce which provides access to a rich source of internal and customer data. Findings – The study finds that the S‐DLogic visualisation of the firm's value proposition in equipment‐based service consists of its contribution to 11 value‐creating activities towards value‐in‐use. The visualisation depicts both the highest possible bundle of benefits for the customer along with the resources and their costs associated with delivering those bundles. When brought together these enable the identification of the optimal bundle of value‐creating activities from both customer and firms' perspective. Originality/value – This paper provides empirical evidence of the difference between a G‐DLogic and S‐DLogic view of the firm's value proposition. In doing so, extending existing literature on S‐DLogic by contributing to a methodological and empirical gap. Notably, it makes abstract concepts of S‐DLogic concrete, providing a pathway for future empirical work and begins the process of systematising a methodology in S‐DLogic.
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WMG Service Systems Research Group
Working Paper Series
Transitioning from a Goods-Dominant to
a Service-Dominant Logic: Visualising the
Value Proposition of Rolls-Royce
_____________________________________________________________________
Irene Ng
Glenn Parry
Laura Smith
Roger Maull
Gerard Briscoe
ISSN: 2049-4297
Issue Number: 05/12
About WMG Service Systems Group
The Service Systems research group at WMG works in collaboration with large
organisations such as GlaxoSmithKline, Rolls-Royce, BAE Systems, IBM, Ministry of
Defence as well as with SMEs researching into value constellations, new business
models and value-creating service systems of people, product, service and
technology.
The group aims to advance the knowledge of value-creating service systems to help
organisations innovate and evolve to new business models and make better
decisions in the design, delivery and management of their value propositions to co-
create value.
In particular, we pursue the knowledge of service systems for value co-creation that
is replicable, scalable and transferable so that we can address some of the most
difficult challenges faced by businesses, markets and society.
Research Streams
The WMG Service Systems research group conducts research that is capable of
solving real problems in practice, and also to create theoretical abstractions from or
research that is relevant and applicable across sector and industry, so that the
impact of our research is substantial.
The group currently conducts research under six broad themes:
Contextualisation
Dematerialisation
Service Design
Value and Business Models
Visualisation
Viable Service Systems and Transformation
WMG Service Systems Research Group Working Paper Series
Issue number: 05/12
ISSN: 2049-4297
3
February 2012
Transitioning from a Goods-Dominant to a Service-Dominant
Logic: Visualising the Value Proposition of Rolls-Royce
Ng, Irene
Professor of Marketing and Service Systems
Service Systems Group, Warwick Manufacturing Group,
University of Warwick, Coventry CV4 7AL, UK.
Tel: +44 (0) 247652 4871, E-mail: irene.ng@warwick.ac.uk
Parry, Glenn
Associate Professor, Strategy and Operations Management
Faculty of Business & Law, University of the West of England, Frenchay Campus,
Coldharbour Lane, Bristol, BS16 1QY.
Tel: +44 117 32 83453, E-mail: Glenn.Parry@uwe.ac.uk
Smith, Laura
Doctoral Candidate
Centre for Innovation and Service Research, University of Exeter Business School,
Rennes Drive, Exeter EX4 4PU, UK.
Tel: +44 (0) 1392 723200, E-mail: L.A.Smith@exeter.ac.uk
Maull, Roger
Professor of Management Systems
Centre for Innovation and Service Research, University of Exeter Business School,
Rennes Drive, Exeter EX4 4PU, UK
Tel: +44 (0) 1392 723200, E-mail: R.S.Maull@exeter.ac.uk
Briscoe, Gerard
Research Associate
Systems Research Group, Computer Laboratory, University of Cambridge,
William Gates Building, 15 JJ Thomson Avenue, Cambridge CB3 0FD, UK
Tel: +44 (0) 1225 763500, E-mail: gerard.briscoe@cl.cam.ac.uk
Acknowledgement: This research was financially supported by the Economic and Social
Science Research Council (ESRC)/AIM Services Fellowship programme and Rolls-Royce
Defence/Aerospace in a consortium led by Innovorsa Ltd. The authors gratefully
acknowledge the contribution of the many staff at Rolls-Royce as well as their customers for
making this research possible.
If you wish to cite this paper, please use the following reference:
Ng I, Parry G, Smith L, Maull R & Briscoe G (2012) Transitioning from a Goods-Dominant to a
Service-Dominant Logic: Visualising the Value Proposition of Rolls-Royce. Journal of Service
Management, Iss 3, forthcoming. Interim location: WMG Service Systems Research Group Working
Paper Series, paper number 05/12, ISSN 2049-4297.
WMG Service Systems Research Group Working Paper Series – 05/12
4
Introduction
To remain viable, manufacturers have bundled equipment sales with support
services. This provision has been commonly referred to as the servitization of
manufacturing (Neely, 2008), a stream of research often dealt with through
manufacturing literature. Servitization has been discussed widely within the
literature, frequently through an examination of the move by manufacturers to
generate greater returns by providing through life support for their products
(Vandermerwe and Rada, 1988; Matthyssens and Vandembempt, 1998; Anderson
and Narus, 1995). As manufacturers add ‘service to the body of product-centric
knowledge, the tendency is to treat service activities as an extension of the body of
knowledge in manufacturing and engineering.
We propose that such a treatment is a consequence of a traditional
manufacturing/engineering literature’s view of value as that of exchange value,
where an offering is of value only when it can be exchanged for something else,
usually money. This logic implies that the manufacturer’s responsibility for value
creation ends upon transfer of ownership, since the ‘exchangeable’ unit produced is
purchased through a transaction with the customer. The utilisation of the product,
usually less visible to the firm and often in a location away from the firm that
manufactured it, is often of secondary importance. Consequently the equipment
manufacturer sees the unit of production, the product, as inherently valuable, even
before its use. Such a perspective employed in the management of businesses is
often referred to as a Goods-Dominant Logic (Vargo and Lusch, 2004; 2008). G-
DLogic pervades contemporary business thinking due to a long history of an
industrial era where economic growth was achieved through a country’s ability to
produce an excess quantity of goods and then export this excess to generate wealth.
The political economy created by such a fundamental philosophy has been the
reason for the dominant view of value as that of exchange, and the interest to
increase such a value for business growth, viability and competitive advantage.
G-DLogic, when extended to services, results in the reduction of service offerings
into exchangeable units such as man-hours, information and other exchangeable
artefacts particularly to ‘service and support’ the product. While it is often
acknowledged that service is more than mere exchangeable units, the service
offering, often consisting of integrated tangible products and human activities,
struggles with the challenge of a lack of visibility. Even if the offering could be
articulated, it is often done so with the customer as a passive entity and the service
as an exchangeable offering i.e. what the firm does for the customer that could be
exchanged for a price, much like the way a product is an exchangeable offering.
Recently, academic literature has proposed the concept of service as value co-
creation where the customer and the firm are jointly involved in co-creating value-
in-use within a service system (Vargo et al, 2008; Payne et al 2008, Ng et al. 2011).
This stream of literature proposes that value of an offering is achieved in-use, rather
than at exchange. By proposing a service-dominant logic (S-DLogic), Vargo and Lusch
(2004, 2008) suggest that the firm’s offering is merely a proposition for the customer
WMG Service Systems Research Group Working Paper Series – 05/12
5
to realise at point of use. Until the point of value realisation, i.e. in use, an offering is
only potentially valuable.
While S-DLogic could be an attractive alternative perspective of the firm’s value
proposition, the prevailing G-DLogic of exchange value, particularly for
manufacturers of equipment, is a mindset that is firmly entrenched and any interest
to make a transition to an S-DLogic faces the challenge of seeking methods and
empirical research that could aid in that transition. In addition, while it can be
argued that value is ultimately that of use, the relationship between the firm co-
creating value in use and what can be an exchangeable value proposition of the firm
is also unclear.
Our paper presents a visualisation of the firm’s offering from a Service-Dominant
Logic (S-DLogic) perspective in equipment-based service. The case of Rolls-Royce is
presented as an avenue through which to explore an alternative view of the firm’s
value proposition, a visualisation informed by S-DLogic that could aid organisations
in their transition from G-DLogic to S-DLogic.
The study finds that the S-DLogic visualisation of the firm’s value proposition in
equipment-based service consists of its contribution to 11 value-creating activities
towards value-in-use; where such value-creating activities occur whether carried out
by the firm or by the customer. Understanding these value-creating
activities/attributes enables the firm to construct its value proposition around the
value-in-use realised by the customer. In addition, the paper finds that a S-DLogic
visualisation of the value proposition allows the firm to see which resources
contribute to which value-creating activity, and thereby assess the firm’s own value-
creating capabilities as well as the associated customer preferences for them. As a
result, firms are able to better determine and align the most effective value
proposition, in terms of fit to the customer value-creating system and the most
efficient bundle in terms of the firm’s process delivery system.
The paper extends existing literature on S-DLogic by contributing to a
methodological and empirical gap. Notably, it makes abstract concepts of S-DLogic
concrete, providing a pathway for future empirical work and begins the process of
systematising a methodology in S-DLogic. It also provides empirical evidence of the
difference between a G-DLogic and S-DLogic view of the firm’s value proposition.
The paper is presented as follows: first, the concept of dominant business logics is
introduced. This is then discussed in terms of the prevailing G-DLogic and the
contemporary perspective of the S-DLogic. From this discussion, the following
research question is developed: ‘How can an alternative view of the firm’s value
proposition, informed by S-DLogic, be visualised?’ The research is then reported
through discussion of the research method and the presentation and discussion of
empirical findings.
WMG Service Systems Research Group Working Paper Series – 05/12
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Literature Review
Business Logics
The notion of a dominant logic is based upon the concept of business schemas,
which provide the linkages between a manager’s mental representation of the
world, as constructed from their experience, and their likely response to change
(Kiesler and Sproul, 1982). A dominant logic therefore refers to the shared mental
maps which groups of managers use and develop as part of core business
operations. This is represented through a common mindset or shared perception of
how a business works and the accepted tools and approaches which are in use by
the ‘dominant coalition’, or senior management team, when making decisions
(Prahalad and Bettis, 1986). A single dominant logic may exist in an individual firm or
multiple strategically similar operations. Moreover, the number and acceptance of
dominant logics is not a fixed state and more may be added or developed through
processes of organisational learning (Garratt, 1987). For example, a conglomerate
may consist of multiple logics and its performance may be limited by the logics
accepted and in use by the senior management team. Senior management will, and
can only work with and apply the logics that they know, whether they are
appropriate or not (Das, 1981).
Organisational learning to develop and adopt new logics is appropriate, if not
essential, for firms engaged in servitization as the transition involves a change in the
underlying basis of environmental competition. Furthermore, current academic
literature suggests that one of the biggest challenges facing servitization, or the
product to service transition, is a change in mindset. This change is bought about by
a move from offering a manufactured product to offering an integrated product
and service offering that delivers value-in-use(Baines et al., 2007). Many authors
have noted that this change requires ‘seeing value through the eyes of the
customer’ (Johnstone et al., 2009), which has presented a significant challenge for
manufacturers whose prevailing business logic is centred on product-based thinking.
This is reflected in the consideration of value prevalent in the Operations
Management literature. For example, Mollenkopf et al (2011) consider how a firm
‘creates customer value’ through better management of product returns, Sawhney
and Piper (2002) define customer value through the traditional operations
management performance management objectives of, quality, dependability, speed,
cost and high performing products. Similarly, Yung and Chan (2003) consider value
as arising from improvements in operational effectiveness and efficiency. There is
also a strong tradition of considering ‘adding value’ in the operations management
(OM) literature. Davis (2011) when identifying challenges for service managers,
considers how information may be used to ‘add value for customers, Noke and
Hughes (2010) consider how SMEs can add value and move up the value chain
through developing new product development capabilities, while Zhang and Gregory
(2011) investigate nine case studies of engineering firms using the value chain
concept to conduct a systematic examination of how engineering contributes to the
‘creation and delivery of customer value’.
WMG Service Systems Research Group Working Paper Series – 05/12
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Value also plays a central role in the section of operations improvement literature
that investigates the concept of ‘lean’. In their seminal text on lean thinking,
Womack and Jones (1996) clearly highlight the central importance of defining value
from the ‘perspective of the customer’ (P311), and they stress that although there
may be many intermediaries, value can only be defined by the end customer.
However, this perspective has not always permeated other authors of lean papers.
Many authors simply omit the customer perspective by making certain implicit
assumptions of value and proceed with value stream mapping; see for example, the
use of simulation models and value stream maps by Gurumurthy and Kodali (2011)
showing the complete absence of any customer perspective of value; and a focus on
value stream maps for process efficiency in a steel mill by Abdulmalek and Rajgopal
(2007); and in the application of lean to service processes in a telecommunications
company (Arbos, 2002). In such literature, the focus is eliminating waste and
achieving process efficiency with the customer requirements considered as an
exogenous variable.
In short, the established understanding of value in the OM literature is producer-
centric and implicitly assumes value to be the amount of money that can be
exchanged for the product. The fact that exchange happens is taken to imply that
value is some ‘essence’ of the product created by the producer through the value
chain of activities, and is improved through operations improvement activities based
around lean techniques such as value stream mapping. Customer requirement for
the ‘essence’ is taken as ex-ante to production, or manufacturing is not considered
to be contextual in any way even though the use, consumption and experience of
the product is what some scholars have argued where value is truly ‘created’ (Ng
and Smith, 2012; Chandler and Vargo, 2011; Vargo and Lusch, 2008).
The scale of the challenge in changing managers’ perspectives on value was
evidenced by Johnstone et al. (2009) who found an embedded engineering culture
of ‘product centricity’ present in a firm considered exemplar in its servitization
transition, and it was manifested in a lack of understanding of customer ‘needs’.
Many researchers have to face the challenge of understanding customer
consumption processes, (Ballantyne and Varey, 2008), with many using the S-DLogic
as a lens through which to make this exploration (Pawar et al., 2009; Macdonald et
al., 2011).
Traditional thinking, or the dominant logic, within manufacturing firms is based upon
tangible units of production, be it materials or equipment, products or services. This
tradition thinking dates back to the work of Adam Smith (1776) which characterises
goods through their exchange value. This work should be viewed within its context,
written at a time of Empire where nations became wealthy through their overseas
trade. As such, exchangeable value became a characteristic of a good, transferring
wealth between nations. One can argue that this understanding continues to
pervade business today. Within such an understanding, goods embody specialised
knowledge and are often highly valued, thus resulting in goods being characterised
by their physical and tradable properties (Demsetz, 1993). This perspective also
means that the manufacturer’s responsibility for value creation ends upon transfer
WMG Service Systems Research Group Working Paper Series – 05/12
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of ownership. The unit they produce is bought through an exchange transaction by
the customer and is utilised for its benefit, usually in another location away from the
firm that manufactured it. Consequently, the equipment manufacturer sees the unit
of production as inherently valuable; the present value of the unit is attributed to its
current owner; and value is realised when the unit is exchanged between parties
(Senior, 1863; Hill 1999). The underlying schemas employed in the management of
businesses where value is in the exchange of unitary outputs, are those relating to a
G-DLogic (Vargo and Lusch, 2004). Goods logic pervades contemporary business
thinking due to its long provenance.
Research and understanding of service also has a long provenance (Parry et al.,
2011a). The IHIP [intangible, heterogeneous, inseparable, perishable] service
characterisation has acted as a touchstone to identify service as different from
products (Hicks 1942; Sasser et al., 1978; Kotler, 2003). Such characterisation may
be seen to identify service as ’what product is not’ and could be taken to be features
which characterise ‘bad’ products [e.g. perishable items]. Such a characterisation
also provides a definition of services which makes them inclusive within G-DLogic
frameworks. The differences between product and service are often located on a
spectrum, with tangibility as the moderator, providing a continuum from product to
service which presupposes coherent and shared underlying logics (Shostack, 1977).
Detailed critique by Edvardsson et al. (2005) into the nature of the IHIP
characterisation concludes that the IHIP characterisation is not a useful approach to
the development of an understanding of value-creation. Indeed, Vargo and Lusch
(2004) make reference to numerous authors who identify that a G-DLogic may block
or hinder understanding of how consumers create value from combinations of
‘goods’ and ‘services and the interactions between them (Grönroos 1994; Kotler
1997; Normann and Ramirez 1993). As such, understanding requires a holistic
systems-based approach to the value-creating space without the constraints of the
boundaries of ‘product’ or ‘services’ (Ng and Briscoe, 2011). Normann (2001) sees
the evolution of customers as not merely the receiver of the product or a source of
business, but co- producers, co-designers and co-creators of value both to the firm
and to themselves. He describesdensity’ as the best combination of resources
mobilised for a particular context. This density is increasingly being enabled by
technology which liberates the world from constraints of time (when things can be
done), place (where things can be done), actor (who can do what) and constellation
(with whom it can be done). Ultimately, Normann’s (2001) notion of density means
that customers would have a whole world of specialist knowledge available when
and where they like. In light of this perspective, businesses can be viewed as
organising value creation rather than delivering ‘products’ or ‘services’. This shifts
the underlying dominant logic away from tangible output or functional processes as
the central focus of exchange, a central tenet of the goods-dominant view.
In 2004, S-DLogic was proposed by Vargo and Lusch as a novel lens, proposing a new
perspective of the world, markedly different from the traditional goods-dominant
view (Vargo, 2011). Though S-DLogic may not claim to be a new insight into the
nature of service (Sharma et al., 2002; Vargo and Lusch, 2004; Bolton, 2004), the
proposal provides a service perspective which places emphasis upon value outcomes
WMG Service Systems Research Group Working Paper Series – 05/12
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realised with customers, instead of the processes or act of provision to customers in
exchange for a price (Vargo and Lusch, 2004). S-DLogic presents a set of
foundational premises seen in Table 1 (Vargo and Lusch, 2004, 2006, 2008).
Table 1: Foundational Premises of Service-Dominant Logic (Vargo and Lusch, 2008)
FP1 Service is the fundamental basis of exchange
FP2 Indirect exchange masks the fundamental basis of exchange
FP3 Goods are a distribution mechanism for service provision
FP4
Operant resources are the fundamental source of competitive
advantage
FP5 All economies are service economies
FP6 The customer is always a cocreator of value
FP7
The enterprise cannot deliver value, but only offer value
propositions
FP8
A service-centered view is inherently customer oriented and
relational
FP9 All social and economic actors are resource integrators
FP10
Value is always uniquely and phenomenologically determined by the
beneficiary
The language of S-DLogic speaks of service, not product or services. This
differentiation has created some confusion and led to criticism of the work
(Deighton and Narayandas, 2004; O’Shaughnessy and O’Shaughnessy, 2011). The
definition of service within S-DLogic is: the process of using one’s competences
(knowledge and skills) for the benefit of another party (Vargo, 2009). Whilst FP1 sets
service as the fundamental basis of exchange, S-DLogic does not reject the value of
goods (Lusch, 2011). FP3 identifies that they may be integral to a value-creating
process and that their effective integration along with other resource is imperative
for economic success (Ballantyne and Varey 2008). S-DLogic provides a dyadic view
of resource and ascribes labels as ‘operand’ and ‘operant’. Operand resources are
passive resources upon which operations or acts are performed. Operant resources
are dynamic, largely intangible and can produce effects (Constantin and Lusch,
1994). G-DLogic is centred upon operand resource and may consider customers as
operand, to be captured and acted upon (Parry et al., 2011b). FP4 presents operant
resources as of primary consideration as these are the resources, which act and
therefore lie at the centre of value creation.
In this sense, S-DLogic reframes the perspective of resource and of value. Tangible
resource is viewed as no longer inherently valuable and thus the focus of
fundamental exchange. Value, under this logic, is no longer an inherent property of a
unitary resource or offering, but rather the outcome from the relational enactment
and interaction between the providers and receivers of an offering. In other words,
value is created not in exchange, but co-created in use or in context (Chandler and
Vargo, 2011, Ng et. al., 2012).
WMG Service Systems Research Group Working Paper Series – 05/12
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A G-DLogic supports the concept that value is realised in exchange, meaning that
value can be manufactured by a producer as a unit of product or service which is
exchanged in a market, usually for money (Vargo and Lusch, 2004). As a result, G-
DLogic requires systems in which resources have an assigned, inherent or
transcendent value, which is not linked to their context. Following such logic, a
manufacturer can produce an object which is inherently valuable and that value can
be measured as an entity ‘at the factory gate’. As such, G-DLogic creates a distinct
separation between producer and consumer and their value systems except at the
point of exchange (Vargo et al., 2008). Value chains represent a linked series of
activities where the provider of an entity performs an act which adds value and then
exchanges the entity with a consumer in the market who forms the next link in the
value chain. Consumers destroy value and must return to the provider to supply
them with further value (Vargo et al., 2008). In this way, a supplier may add value
for a consumer through the provision of a valued entity. Collins (1986) illustrates
value-added services in his work on telecoms provision, where any value proposition
beyond basic voice service is described as a ‘value-added service’.
In contrast to the separation of producer and consumer found with goods-dominant
thinking, S-DLogic states in FP6 that value is always co-created with the customer
(Vargo and Lusch, 2008). The concept of value co-creation rejects the separation of
the traditional value chain and proposes a value system where producer and
customer in a relational system create value through the integration of their
resource (Lusch, 2011). Co-creation further recognises that value is realised and
determined by the customer in use, made explicit in FP10 (Ramirez 1999; Grönroos
2004; Payne et al., 2008; Vargo and Lusch, 2008). From this perspective, customers
do not make purchases for the sake of making a purchase; they seek a value
proposition, which they perceive to be potentially valuable and the value of the
entity is only realised within the customers’ context. Until the point of value
realisation, i.e. in use, the offering is only potentially valuable; the implication for
the firm being that they cannot deliver value, but only offer value propositions, as
stated in FP7.
Despite discussions of and arguments for an S-DLogic approach, there has been, to
date, little work in trying to operationalise the logic. If a firm chooses to make a
transition from a G-DLogic to a S-DLogic, what is required is to demonstrate that an
empirical construction of an alternative view of the firm’s value propositions,
informed by an S-DLogic, is possible. Only then could firms gain an understanding of
why and when S-DLogic might be useful and understand that they have a choice in
the two logics. Awareness and knowledge of alternatives can then assist firms in
examining the different logics and explore what can and cannot be known for
certain, and how to progress the transition. This concept of critical evaluation is
described by Kitchener (1983) as epistemic cognition; characterised as the process
the individual uses to examine a problem based on their knowledge, beliefs and the
truth of alternative solutions.
WMG Service Systems Research Group Working Paper Series – 05/12
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This paper reports on a study into the following research question: How can we
construct an alternative visualisation of a firm’s current offering (value proposition),
informed by S-DLogic?
Visual representations have been shown to be effective to solicit assistance from
others (Henderson, 1999). They are used to assist ways of knowing about a
phenomenon across different communities, even though individuals may have
different interpretations, and may be presented as ‘boundary objects’ where
understanding is shared (Star and Griesemer, 1989). However, a visual
representation may be labelled an ‘epistemic object’ if it reveals an unfolding
ontology’, remaining incomplete and emergent, giving rise to questions (Knorr
Cetina 1997; 2001)
Method
The paper presents an exploratory, single case study conducted for the purpose of
operationalising and investigating the firm’s offering from the perspective of two
logics and to construct an empirical visualisation of the firm’s offering, informed by
S-DLogic. A single case is deemed appropriate as exploration of the offering,
particularly from two logics, requires access to multiple stakeholders and multiple
data sources which help to support rich empirical descriptions (Eisenhardt and
Graebner 2007, pp.25). Moreover, literature highlights two key variables of
contrasting perspective between the G-DLogic and S-DLogic, resource and value. The
relationships between the offerings, their proposed value and the resources
required to deliver them, particularly those of bundled product and service
elements, are deeply complex and multifaceted. Consequently, they are arguably
best examined and understood through a variety of data sources and evidence
which help to construct “as-near-as-complete” picture of the phenomenon studied
(Meredith, 1998).
The case offers a holistic perspective of the offering proposed by a single contract
operating in the context of defence aerospace. The contract is for the service,
support and maintenance of equipment (usually termed as an asset) and support of
a multi-purpose military helicopter, which has been in operation for over 30 years.
The particular contract examined is held between Rolls-Royce and a European
defence department and is deemed to be representative of contracts that bundle
elements of product and support services. It also presented an opportunity for
uncommon research access and maintenance (Yin, 2003). Research into the offering
was carried out in two stages. The first stage studies how value is interpreted,
created and achieved in use and in exchange, and the second stage constructs an
alternative view of the value proposition through a conjoint study and a
visualisation.
Stage 1: Investigating the Value of the offering in exchange and use
In the first stage, data was collected on value associated with the offering. Value
data was conducted using a multi-method research design involving analysis of texts,
WMG Service Systems Research Group Working Paper Series – 05/12
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documents and secondary data, as well as recording and transcribing of interviews
and meetings (Dooley 2001).The data was collected from a number of texts and
documents including company marketing, customer materials and contract
documents. This was supplemented with a number of primary stakeholder
interviews. The selection of key informants for the interviews is critical to the
process of identifying and describing the value proposed by an offering. First, 11
employees involved in the delivery of the contract were selected, primarily from
asset/equipment management and customer-facing support roles as they were
considered to have the strongest influence on the potential value proposed and
communicated by the firm. Furthermore, given that assessment of value from an S-
DLogic perspective requires the development of an understanding of value from the
numerous perspectives of those engaged in the value-creating system (Mills et al,
2011), interviews were not only conducted from the firm’s perspective (Walter et
al., 2001) but also from a customer’s perspective (Woodruff and Gardial, 1996).
Three additional interviews were conducted with members of the customer
organisation; one individual was selected based on their involvement with
procurement of the offering, one as an operator or user of the offering and the final
customer interviewee was selected from a strategic management level. All
interviews were recorded and verbatim transcribed.
Analysis
The data was then analysed to construct two perspectives of the offering; a G-DLogic
view centred on exchange value and an S-DLogic view centred on value-in-use. A G-
DLogic view, also referred to as ‘manufacturing logic’ (e.g. Normann, 2001)
emphasises how firms exchange ‘output units’ (Chandler and Vargo, 2011). Given
this orientation, the outcome of resources deployed for this view by the firm must
sit at the point where exchange of such units occurs between the firm and the
customer. The analysis therefore sought to abstract these exchange units which are
seen to be inherently valuable from a G-DLogic perspective. These are units ‘owned
by the firm’ or are seen to have ‘sell-ability’. It has to be emphasised that the G-
DLogic view was the prevailing view and very little analysis was necessary as the
exchange units were the resources in themselves.
An S-DLogic view was also analysed with the same set of data. In the latter analysis,
the firm’s offering was analysed not as units of exchange, but as ‘service streams’
(Chandler and Vargo, 2011) i.e. activities that constituted part of the whole value-
creating system where the customer’s activities to achieve value-in-use is also part
of the system. This meant the need to abstract high level collaborative value-
creating activities (VCAs) that constitute the nature and context of realising the
value-in-use of equipment, whether such activities are performed by the firm or the
customer. Eleven VCAs were abstracted and are reported below. Informant
feedback was sought on the 11 VCAs. First, to resolve any inconsistency and to
improve content validity, the researchers conducted a participant workshop with
firm employees. The study’s methodology and the results of the 11 VCAs were
presented. Participants received a description of the results and were asked to
comment on how well each reflected their experience and practice. The same
process was carried out with customer participants.
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Moving to Stage 2. In answering the research question, it was not sufficient that the
set of value-creating activities were articulated. Rather, since the set of value-
creating activities could be performed by either the customer or the firm, an S-
DLogic view of the firm’s offering must be the firm’s part within the value-creating
activities. Finally, to complete the S-DLogic view of the firm’s offering, no longer that
of selling exchange units but being part of the value-creating activities, it was also
necessary to articulate the combination of the firm’s resources linked to its
corresponding value-creating activities so that the resource integration for value-in-
use can be demonstrated. The study then proceeded to Stage 2.
Stage 2 –Constructing and Visualising the firm’s S-DLogic Value Proposition
Discovering the firm’s Value Proposition informed by S-DLogic. In the second stage
and to obtain insights of the firm’s role within the value-creating system, a conjoint
survey was conducted with the customer. Conjoint analysis has been found to be a
reliable method of obtaining an understanding of attributes which determine the
buying behaviour of the consumer (Green and Srinivasan, 1990; Li et al., 2006;
Verma, 2010). In the survey, the six individuals were shown a controlled set of
potential VCA bundles where the VCAs were either provided or not provided by the
firm, and if provided, to trade-off the performance of the provision. Respondents
were asked to evaluate and choose between potential attribute bundles rather than
to simply select preferred attributes; this is considered a more realistic choice
situation. Each bundle was constituted by multiple conjoined value-creating
activities (see Figure 1 for an example of three bundles). By analysing how
customers trade off choices between potential VCA bundles, the implicit valuation of
the individual VCAs making up the firm’s value proposition in the VCAs can be
determined (Verma, et. al. 2008).
Figure 1
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Collection of Resource Data. S-DLogic requires an understanding on how entities
integrate resources to create value. Hence, to empirically understand resource
integration in the VCAs, actual resource data was collected from a number of
secondary data sources including five years of ERP data on problem types, date/time
of query, departments involved in dealing with queries, and times of work begun
and completed in each department involved with the delivery of the contract. In
addition, five years of detailed call centre data on employee grades answering
queries and associated labour rates, as well as access to a complete set of process
maps were also obtained. Since this work studies the firm’s role in the VCAs, it was
necessary to understand resources as distinctly different from the context where the
VCAs were performed. Hence, resources are “bundles of potential service” (Chandler
and Vargo, 2011, p.39) and the activities are the processes through which resources
are realised to achieve value. To do so, it was necessary to uncover processes and
practices that were often taken for granted by the firm, were not immediately
visible or obvious, and were not part of formal processes so as to obtain a more
complete understanding of resource utilisation in the firm’s role within VCAs. To do
so, 12 further interviews with firm employees involved with the firm’s processes
were also conducted.
Analysis
The resulting conjoint (trade-off) analysis measured the individual customer’s
perceived value of VCAs. The implicit valuation of the individual service attributes
was determined by focusing on how each customer makes preferences between
these service bundles. These implicit valuations were used to build a model of
customer preference, including associated sensitivity of individual and bundled
VCAs. The conjoint survey served to achieve an understanding of trade-offs between
the VCAs and understand the customer’s preference towards the firm’s role within
the VCAs. From the resource perspective, S-D Logics suggest that ”resources are not,
they become.” (Vargo and Lusch, 2004, p.2). In other words, resources are only
active in enabling processes. This depiction of resources as activities and the focus
on process in service is the domain of operations management (Silver, 2004;
Ponsignon et al. 2011). From the operations and process standpoint, to visualise
resources as activities we first developed a process model for each of the VCAs and
then developed a discrete event simulation model to visualise the impact of changes
in volume and variety of inputs on the resources. The key features of the simulation
models are as follows: Each query arrives at the start of a process and undergoes a
series of activities. The query is processed and follows a pre-determined sequence of
tasks. Activity times and arrival rates are based on statistical distributions. Costs are
accumulated as work is done. One year was modelled based on five years of data for
all engines. For each process, four scenarios were simulated. Two variables with two
possible states each were used as key inputs to the models in order to show the
degree to which resource consumption and process costs vary:
1. Query arrival variability (i.e. how even the calls arrive): “Current” state (i.e. fairly
smooth) and “increased” state (i.e. more lumpy arrivals)
2. Task variability: “Current” state and “reduced” state (i.e. improved processes)
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The above analysis enabled the S-DLogic view of the firm’s value proposition as a
contribution to the value-creating activities consisting of activities and attributes
such as credence attributes related to the Rolls-Royce brand; they are listed and
defined in Table 3. The conjoint survey then generated a customer preference model
based on the firm’s value proposition within the value-creating activities, linked with
the resources utilised to achieve the VCAs.
We argue that the combination of the firm’s provision of the VCAs backed by
resources integrated to perform them would then constitute an S-DLogic view of the
firm’s value proposition. To complete the visualisation, a Microsoft Excel
demonstrator tool was created to demonstrate the S-DLogic view and screen shots
of the programme presented below.
Findings
Value Propositions of Two Logics
G-DLogic view of Equipment-based Value Proposition. Our findings suggest that a
traditional view of the firm’s value proposition considers resources as ‘exchange
units’.
Table 2: GDLogic Exchange Units
Exchange Units i.e. what we can sell you
Engine (asset)
Time in terms of Manhours (skills, information and competencies are
embedded within the hours)
Spares
Infor
mation (reports etc.)
In examining the traditional view, four primary exchange units are found: the engine
which represents the core asset of the offering; time in terms of man-hours, which
represent the time spent on maintaining or ‘servicing’ the asset as well as time spent
on requests by customers such as constructing reports and delivering information;
spares, which are again assets forming subsystems of the engine; and information
such as reports and documents on asset health, monitoring, condition and use.
In combination the four exchange units created the traditional Rolls-Royce value
propositions, centred on obtaining high exchange value: sales of the asset; time and
materials contracts; spares inclusive contracts and availability contracts.
The four exchange units are the operand resource (resource which is passive and to
be used) and the resources were made available in different contractual
combinations and traded through exchange with the customer, such that the
customer bought the asset, engineer’s time, spare parts or information. We argue
that such a characterisation of the offering as operand resource with value in
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exchange is consistent with a G-DLogic perspective. Since the focus of G-DLogic was
exchange value, less attention was paid to the customer activities to realise the
value proposition.
S-DLogic view of Equipment-based Value-creating Activities. In contrast to the G-
DLogic view, a S-DLogic view required the abstraction of all VCAs that were shared
between the firm and the customer, since the outcome of an S-DLogic view was not
exchange value, but to achieve value-in-use. The list of VCAs to achieve value-in-use
of equipment found in the study is presented in Table 3, together with its
descriptions. While 10 of the attributes are activities, brand was included as an
attribute of value creation. This was because the study found that although it may
not have been manifested as activities within the system, it was perceived to have
created value for the customer. These 11 VCAs are found to be the high level value-
creating activities to achieve customer value-in-context of the engine, whether the
activities are performed by the customer or the firm. The 11 VCAs, the resources,
processes and simulation data are presented in an Excel visualisation as below:
Table 3: SDLogic Value Creating Activities/Attributes (VCAs)
Value Creating
Activity/
Attributes
Activity/
Attribute
Definitions
Activity/
Attribute
Performance
Levels
1 Brand Preferred brand
·Rolls-Royce
·Other brand
2 Equipment
Performance
The alignment of the
equipment
specification to the
desired level of power
output, economy,
durability or other
performance
measure.
·Exceeds
desired
equipment
performance
· Meets
desired
equipment
performance
3 Technical Query
Resolution Speed
The time taken to
resolve a customer
technical query
·Delivered
within
‘Customer
Required By’
date
·Not
guaranteed
within the
‘Customer
Required By’
date
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4 Recovery
Concessions
The issue of a
technical variance to
the original design
specification of a
piece part or a repair
process to allow the
continued usage or
repair of the
equipment enabling
a quicker return to
serviceable status
·Recovery
concessions
granted for
specified time
and/or
serialised
parts
·Recovery
concessions
not granted
5 Equipment Repair
Service
fixing the piece of
equipment should it
bec
ome out of order or
broken (repair,
unscheduled or
casualty maintenance)
·On-site repair
·Off-site repair
·No repair
service
provided
6 Equipment
Maintenance
Service
Performing routine
actions which keep the
equipment in working
order (known as
scheduled
maintenance) or
prevent trouble from
arising (preventive
maintenance).
·On-site
maintenance
·Off-site
maintenance
·No
maintenance
service
provided
7 Component
Forecasting &
Provisioning
A service which
forecasts the usage of
parts for a particular
group of equipment
to allow for timely
provision of these
parts.
·Provided
·Not Provided
8 Through-Life and
Obsolescence
Forecasting &
Planning
Recommendations
Forecasting and
planning
recommendations for
a group of equipment
in order to maximise
the potential usage at
minimum cost over
the equipment’s life
time.
·Provided
·Not Provided
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Recommendation of
solutions to minimise
disruption at
equipment end of life.
9 Capability
Forecasting &
Planning
Recommendations
Provision of advice on
the optimal
configuration of a
group of equipment
to ensure maximum
equipment availability
at minimum cost.
Advice on working
equipment numbers
needed to support a
group of equipment
month to month.
· Provided
. Not Provided
10 Equipment
Operating Advice
Advisory service on
how to operate the
equipment to
maximise
performance and
longevity.
· Provided
· Not Provided
11 Equipment Configuration
Advice for Operational and
contextual Capability
Advice on the optimal
configuration of a
group of equipment
for a specific
operational
requirement
e.g. - these engines,
with these flying
hours, in this
combination on wing
to allow you to fly X
helicopters, X miles, in
X conditions
Advice on the optimal
configuration of a
group of equipment
for a specific
operational
requirement to
achieve a specific task
·Provided
·Not Provided
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19
in a specific context
e.g. - these engines,
with these flying
hours, in combination
with other platforms
to achieve a
successful mission
(that could be variable
in nature) in an
optimized manner
The Importance and Sensitivity of the Customer to the Value-creating Activities
Figure 2 shows the 11 VCAs, including VCA importance and VCA sensitivity, as well as
the process map and process costs of achieving the activities. Taking the ‘Technical
Query Resolution Speed’ VCA as an example, the screenshot (as shown in Figure 2)
displays the importance of and the sensitivity to this attribute for the customer, as
well as the internal process model and process costs of delivering to this VCA.
Figure 2: Attribute Query screenshot
£’s
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VCA importance represents the relative importance, as a percentage, of a particular
attribute for the six individuals that compose the selected customer group, where
the 11 VCAs are equal to 100%. It is possible to display VCA importance for the
entire customer group as well as for the specific sub-groups within it, presented
here as two groups, buyers and users (i.e. Buyer Leaning and User Leaning). This
helps to reveal differences in attribute importance within the customer community.
VCA sensitivity refers to the extent to which a customer’s preference score is
affected by a change in attribute level. In other words, attribute sensitivity shows
the impact that changes to the service bundle have on customer-perceived value.
Finally, the process map of the activity is displayed on the left hand side of the
screen (see Figure 2). Resource consumption and process costs associated with the
delivery of each VCA were estimated using simulation models. For each process
model, four scenarios were set up to visualise the impact of a change in key process
variables (i.e. arrival rate variability and task variability) on total VCA costs. The
demonstrator was populated with the seven simulation models. We found that we
could then visualise four different cost calculations for providing each of the 11
VCAs. This approach takes the logic of Penrose (1959) when she describes how the
same set of resources could contribute to different heterogeneous services. By
showing the processes and costs, we are able to demonstrate the resource
integration to achieve each of the 11 VCAs, necessary for an S-DLogic visualisation.
Figure 3: Attributes screenshot
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The Firm’s Value Proposition in the Value-creating Service System
Through our analysis, we can then visualise the firm’s value proposition possibilities
from the VCA Information screen (shown in Figure 3), which illustrates the list of
VCAs that are feasible for the firm. It also indicates the importance of and sensitivity
to the attributes across all of the individuals that belong to the customer group. This
function enables the firm to construct its value proposition based on the provision of
VCAs that best fit the customer’s own ability to provide their own VCAs manifested
based on their preferences. Figure 3 shows that attributes 7-11 are VCAs that the
customer considers to be less important for the firm to provide, and we can infer
from the lack of importance and sensitivity that they can provide it for themselves
internally. This is confirmed by the interview data since the contract analysed was a
time and materials contract, so activities closer to use are often provided by the
firm. Yet, our findings showed that outcome advice is preferred by some in the
customer community, suggesting a lack of resource capability by the customer to
adequately provide for themselves.
Figure 4: Preference Utility of Bundles screenshot
Figure 4 shows the Utility of Bundles screen, which allows the firm to compare
bundles of its value propositions that best fit the firm in terms of their customer’s
preferences for the firm’s provision of the VCAs. For every bundle created (which
can be done by manipulating the VCA and associated VCA levels), the total customer
preference and the total costs of service delivery are displayed at the bottom of the
£ x £ x + 10
WMG Service Systems Research Group Working Paper Series – 05/12
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screen. The firm can visualise changes in costs when different bundles are selected.
For each bundle created, four different scenarios can be simulated to assess the
impact on process costs.
Visualising the Effectiveness and Efficiency of the Firm’s Value Proposition
The study presents an S-DLogic view of the firm’s value proposition within the
customer’s value-creating system towards outcomes, and demonstrates the firm’s
resource integration activities to achieve these value-creating activities. We
demonstrate how an S-DLogic view could directly link value-creating activities to the
costs and resource integration processes of the firm. Through the S-DLogic view, we
can determine the most effective bundle from the perspective of the customer (i.e.
outside-in) where the firm’s value proposition could fit. The effective bundle is
defined as the first best feasible bundle of VCA offered by the firm that provides the
highest possible benefits (in terms of part-worth utilities) to the customer
community, as it best fits with the customer’s capability and resources. However,
the S-DLogic view also shows the resource integrate necessary to contribute to the
value-creating system. This we demonstrated through the simulation models of the
processes supporting each value-creating activity, and we can determine the most
efficient bundle from the perspective of the firm’s resources and costs (i.e. inside-
out) for the firm to provide. Ultimately, the S-DLogic view of the firm’s value
proposition informs the selection of the optimal bundle of VCA provided for the
customer, the one that contributes most effectively to the customer system and the
firm’s delivery efficiency.
The Role of the Physical Asset in the Firm’s SDLogic Value Proposition of
Equipment-based Service
From analysing the interviews and constructing the visualisation, our findings
suggest that an asset designed and engineered for a transfer of ownership and to
obtain exchange value (G-DLogic) so that the customer achieves the outcomes on
their own through the use of the asset, may not be the most optimal asset for
achieving outcomes together with the customer (S-DLogic), where such outcomes
are now the joint responsibility of both parties. In other words, an asset designed
and engineered for achieving outcomes together with the customer allows the firm
to have access to some of the customer’s resources in use contexts that could
change how an asset could be better designed for use.
Discussion
The paper integrates an operations management approach in process mapping,
design and simulation with choice modelling in B2B marketing. This is achieved
through a systemic visualisation of resource integration for value-in-use, while
locating the firm's value proposition within the system. It is argued that this
synthesis can be viewed as an operationalisation of S-DLogic. As a result, our
research contributes to a methodological and substantive gap in current research in
S-DLogic. Through our visualisation of an S-DLogic-informed value-creating service
WMG Service Systems Research Group Working Paper Series – 05/12
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system and resources integrated to achieve them, our study found that it is possible
to articulate what ‘effectiveness’ is i.e. the fit of the firm’s resources to the
customer’s resources to co-create value-in-use for equipment. Focusing on value-in-
use activities results in the understanding of how to adapt, modify and enhance the
firm’s value proposition for greater effectiveness and efficiency. Our study also
shows that an S-DLogic view of the value-creating service system reveals a tension
between the effectiveness and efficiency of the firm’s service provision.
The findings suggest that transitioning to a S-DLogic through the creation of a
visualisation enables the firm to see what resources contribute to which value-
creating activities that are aligned to the value realised by customers in use and in
context without predetermining the boundaries of what is served by the ‘product’
and what is served by the ‘service’. By being able to visualise the firm’s offering as
only part of the value system, the firm can see how the propositions fit with the
customer’s mission. Being able to see the resources that contribute towards these
hybrid value propositions suggest that the firm needs to re-evaluate its internal
structures and boundaries so as to understand which resources are most useful to
create capabilities that are less easily replicable.
Our study seeks to disassociate exchange value from exchangeable units, and
suggests exchange to be more aligned to value-in-use. In this sense, our study
endorses the S-DLogic view that “service is the fundamental basis of exchange”
(p.7,Vargo and Lusch, 2008). Our visualisation proposes that the firm’s contribution
to value-creating activities (its service) becomes a value proposition and the
customer’s contribution to the value-creating service (its service) is what creates the
value-in-use. In this sense, the firm’s service is exchanged for money so that the
customer can ‘complete’ its value-creating activities, but it is also possible that the
money could be substitutable with other resources in the value-creating service
system, if the customer could appropriate resources from elsewhere.
However, the study is not without limitations. In particular, our study has not yet
investigated the impact of the visualisation on a transition from G-DLogic to S-DLogic
in terms of managerial mindsets. In other words, no changes to Rolls-Royce's
practices or mindset were implemented or investigated as a result of the
visualisation. Furthermore, operationalising a S-DLogic perspective and constructing
a visualisation required a research facilitator; this was not a process Rolls-Royce
could have engaged in independently. It should also be noted that the paper
explores an alternative view informed by S-DLogic; this is only one representation of
an alternative logic.
In addition, the research conducted in this paper is exploratory and therefore future
research should not only seek to address this limitation but should test the
findings through further case research into other outcome-based contracts. Future
work to test the wider applicability of the 11 value-creating activities in other
equipment service domains would be suited to a methodology that includes multiple
cases of both literal and theoretical replication, whereby each case should be
selected so that it either predicts similar results (a literal replication), or produces
WMG Service Systems Research Group Working Paper Series – 05/12
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contrary results to those found in this paper but for predictable reasons (a
theoretical replication) (Yin, 1984, pp. 48-49).
Implications
The findings showed that S-DLogic was useful when there is a need to have a
complete understanding of the value-creating service system, where all entities, be
they product or people, rendered a ‘service’ or a ‘competency’ into the system for
outcomes. This is especially important to inform not merely process design of the
human activities, skills or the supply chain, but also the design of the equipment
itself. This is especially so when there is a need to re-evaluate the role of the
product, processes and technologies in the system. S-DLogic became a valuable
approach in considering the design and reconfiguration of the whole system, and
proposed that in considering the whole value-creating service system, products
within the system could be re-designed not merely for function (which is a
contextual) but for what the products should afford (Gibson, 1979). In other words,
an S-DLogic approach is useful when there is a need for a product to be redesigned
and re-engineered for its relationship with other products and with human activities.
By doing so, the product becomes an enabler of value creation. Our study suggests
that the visualisation of the S-DLogic-informed value-creating service system can
assist the firm in changing mindsets and interrogating existing boundaries and legacy
knowledge in manufacturing as well as emerging new business models. In terms of
the research applicability, this study suggests a re-examination of value for the
service sector as well. For example, financial products, tourism and hospitality and
transportation offerings may consider their value proposition only in terms of what
they give for what they get i.e. a ‘provisioning’ mentality, rather than being an
organiser of value creation with the customer. ‘Provisioning’ is analogous to a
product that is exchanged and it may set the boundary of an offering such that it
could limit potential innovation. Since customer resources are critical to creating
value, firms should see their role as enabling, facilitating and designing contexts of
experience, appropriating customer resources through collaboration and
cooperation. Such a mindset creates a more engaged customer and evolves the firm
towards understanding what new value propositions could be possible within the
customer space.
Conclusion
This paper has sought to operationalise some of the key aspects of S-DLogic, most
notably focusing on the constructs of value and resources. We have explored this
through a single case; Rolls-Royce which has provided access to a rich source of
internal data and enabled the research team to also conduct independent data
collection with their customers.
The results of this comprehensive exercise have been developed into a visualisation
of the firm’s value propositions. This visualisation depicts both the highest possible
bundle of benefits for the customer along with the resources and their costs
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associated with delivering those bundles. When brought together, these outside-in
and inside–out perspectives enable the identification of the optimal bundle of VCA
from both customer and firms’ perspective.
The visualisation and its attendant supporting framework are key steps in
developing an approach for operationalising S-D Logic. Such an approach would have
a number of stages with activities and questions, pro-formas etc that can
subsequently be integrated in such a way as to produce a complete step-by-step
approach to visualising value co-creation. At the heart of any process methodology
of this type is the final integrating framework.
The integrating framework produced by this research is depicted in the visualisation
where we draw together the customer utilities/preferences and the costs of
providing those bundles in one framework. In line with the guidance provided by
Neely et al (2000), this framework requires further testing in additional case
companies and subsequently facilitator free testing. All of this must then be
documented and disseminated. This will be the focus of the next phase of this
research.
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