Service-Dominant Logic as a Framework for ...

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Service-Dominant Logic as a Framework for Innovation within Networks

Cristina Mele Tiziana Russo Spena Maria Colurcio Business Economics Department– University of Naples “Federico II

Abstract This work explores the potential for utilising the service-dominant (S-D) logic of Vargo and Lusch (2004, 2006, 2008a, 2008c) as a framework for innovation processes from a network perspective. The work presents a conceptual framework for the subsequent empirical study of this issue by undertaking a literature review of S-D logic; value co-creation; (iii) and innovation seen in terms of the knowledge relationship and value. Based on qualitative findings from case studies the work develops an interpretive framework that posits innovation in terms of the S-D notion of ‘value co-creation’ and the emerging concept of ‘value innovation’. The work

Electronic copy available at: http://ssrn.com/abstract=1934862

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concludes that S-D logic provides useful insights for the development of networkbased, value-generating innovation processes.

Keywords: Inovation, Network, Value, S-D logic, Co-creation

Electronic copy available at: http://ssrn.com/abstract=1934862

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1. INTRODUCTION In the service-dominant (S-D) logic that Vargo and Lusch (2004, 2006, 2008a, 2008c) propose, the concept of “service” interweaves closely with the notion of “value” (Vargo, Maglio and Akaka, 2008). As Edvardsson, Gustafsson and Roos (2005, p. 118) observes when commenting on the roles of service and value: “Service is a perspective on value creation rather than a category of market offering”. According to the S-D logic, firms act as resource facilitators and integrators in the co-creation of value through configurations of people, technologies, and other resources (IFM and IBM, 2007; Maglio and Spohrer, 2008). Within this perspective, innovation has the potential to assume a key role in the value-creating process. As Michel, Brown and Gallan (2008) point out, the S-D logic provides a novel theoretical viewpoint that encourages a reappraisal of the nature and management of innovation. Unfortunately, the prevailing discussion about innovation has been predominantly based on a goodsdominant (G-D) logic, even when the offering is, itself, a service. This paper explores the potential for framing innovation within the emerging S-D logic. Focusing on recent developments in the evolution of S-D logic the work aiming at developing an interpretative framework of innovation in terms of the S-D notion of ‘value co-creation’ and its linked and emerging concept of ‘value-creating network (Gummesson 2006; Cova and Salle 2008). The paper is organised as follows. Following this introduction, the paper presents a conceptual background for the study by undertaking a literature review of: (i) S-D logic; (ii) value co-creation; (iii) the role of knowledge and relationship in innovation; (v) the role of value in innovation. Then it is discussed the potential for framing innovation within S-D logic and the empirical study is presented. The qualitative findings from

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case studies of the innovation processes of three international Italian-based firms are analysed. The analysis focus on how the firms link their innovation processes with value creation, from a S-D logic. On the basis of these research findings, the paper develops an interpretative framework of innovation within S-D logic

that posits

innovation in terms of value co-creation and the concept of ‘value innovation’ within networks. The paper ends with a discussion of the managerial implications, limitations of the study, and suggestions for future research. 2 CONCEPTUAL BACKGROUND 2.1 Service-dominant logic The term “logic” comes from the Greek word logikos: coherence, rigor in the reasoning, intellectual, dialectical, argumentative. Searching for the concept into dictionaries we found a difference between two main meanings: 1) reasonable thinking - that is based on good judgment; 2 formal thinking - the system or principles of reasoning applicable to any branch of knowledge or study. In economics and business a logic is more than these sentences: it is about a whole of principles and believes on which drawing for scientific research and operative behaviour. It reflects the values and the interests of researchers and practitioners adopting it, even if it is not a paradigm (Khun, 1970) which is a social construction “reflecting the values and interests of the dominant researchers in a science and in their reference group” (Arndt, 1985, p.11). If a paradigm is the stable, consolidated pattern, a logic can be a new mind-set challenging the old model. This case is the one of the services-dominant (S-D) logic of Vargo and Lusch (2004, 2006, 2008a, 2008c) that aims to provide a broad and insightful framework of business logic that replaces the traditional goods-dominant (G-D) logic of

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transactional exchange. In the traditional G-D logic, the emphasis is on tangible resources, with the units of output being the focus of exchange. According to this view, the production process concerns with the embedding of value in goods. The customer is outside this process, waiting for consumption. In its most basic form, this logic is the logic of so-called “Fordism”, which is essentially a mid-twentieth century philosophy of mass production of value-embedded goods, followed by mass consumption of those goods. Beginning in the 1980s, Several new research streams challenge the logic of Fordism. These streams include services marketing and management (Gummesson, 1987; Grönroos, 1994), industrial marketing and purchasing (Hakansson and Snehota 1995), total quality management (Deming, 1986), and resource-based theory (Barney 1991; Morgan and Hunt, 1994). These new ideas and models supersede various aspects of the established logic of “Fordism”, even if they fail to replace the established logic with an entirely new paradigm (Kuhn, 1970; Arndt, 1985). More fundamental change is apparent from the beginning of the 21st Century as attempts try to conceptualise an entirely new logic for marketing (Gummesson, 2008a). Normann (2001) is an early proponent of this movement; Normann argues for a “service logic” to replace the prevailing manufacturing logic. More recently Vargo and Lusch (2004, 2008a, 2008b) propose their idea of ‘S-D logic’ to challenge the prevailing theory and practice of marketing. According to Vargo and Lusch (2006, p. 43), S-D logic posits service as “the application of specialized competences (operant resources, knowledge and skills) through deeds, processes and performances for the benefit of another entity or the entity itself”. In the view of the authors (2006, p. 48), the focus of the economic exchange is

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on the exchange of services (“service is exchanged for service through relationship”), whereas goods are enablers of this service provision. In commenting on the development of these so-called “new” approaches to marketing and business, Grönroos (2007, p. 197) notes that the conception of service logic in terms of: …. a firm facilitates processes that support customers’ value creation… is not new, but it has never before become an issue for marketing, only for service marketing …. According to Grönroos (2007), the essential difference between “service logic” and “goods logic” is the role played by the customer—whereas goods logic is unaware of the value of the contribution made by the interaction between producer and customer, service logic utilises a variety of resources (including goods, information, infrastructure, systems, people, customers) to create value from this interaction. Grönroos (2008) raises some objections to the purported dominance of S-D logic in contending that service logic cannot determine marketing in all situations, and that other logics might still be productive in certain situations. The main point stresses the importance of the interactions between a firm and its customers, especially the interactions that take place during the consumption or usage processes. According to Grönroos (2008), a supplier should make a strategic business decision, depending on the circumstances, to adopt either service or goods logic. In a similar vein, Brodie, Pels, and Saren, (2006) also challenge the theoretical dominance of one logic over another. According to these authors, an alternative logic of “goods and services [rather than] goods toward services” should be adopted—thus allowing for multiple perspectives and the use of a variety of marketing practices by

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firms. Brodie et al. (2006) thus recognise the utility of a pluralistic approach being adopted by companies, whereby some have a better fit with a goods-centred logic, some with service-centred logic, and others with both. Gummesson (2008a, 2008b) offers a somewhat wider view of S-D logic in questioning the deficiencies of overt customer-centricity. He contends that there is a need to apply a network-based stakeholder approach (so-called ‘many-to–many marketing’) in which the creation of service is not limited to the supplier and the customer, but involves a network of activities involving a host of stakeholders. 2.2 Value co-creation: customer and stakeholder approach As Vargo and Lusch (2008a, p. 26) observe: “Service implies doing things with and for someone. It implies relieving and enabling them in the joint process of value creation”. The customer is the foundation of S-D logic—not simply in terms of a ‘customer orientation’, but as the principal actor in value creation. In S-D logic, value embeds not in a product; rather, the customer determines value. The firm cannot therefore unilaterally create and/or deliver value; indeed, the offering has no value before a customer consumes or uses offering. This value is always co-created (jointly and reciprocally) through interactions between the provider and the beneficiary in which resources are integrated and competencies are applied (Aitken, Ballantyne, Osborne, Williams, 2006; Lusch, Vargo, Malter, 2006; Vargo et al., 2008). Various authors offer different opinions on the notion of the ‘co-creation of value’ as envisaged by S-D logic. Adopting a processing view of customer–supplier relationships, Payne, Storbacka, and Frow (2008) develop a framework for the co-creation of value in which a customer value-creating process, a supplier value-creating process, and an

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encounter process appear. According to this view, the supplier creates superior value propositions and customer determines value when he/she consumes a good or service. Grönroos (2008) adopts a consumption perspective in contending that Vargo and Lusch (2008a, 2008b) have misinterpreted the consumer’s role in value creation. Grönroos (2008, p.298) affirms: “… accepting value-in-use as a foundational value creation concept, customers are the value creators”. The supplier can become a cocreator not only making promises but by developing interactions with its customers that is by applying a service logic. Distinguishing co-creation and co-production Grönroos (2008) points out the roles of customers and supplier who can co-produce – by interacting - a market offering consisting of a service as a value-supporting process and goods as value-supporting resources (Grönroos, 2006). Taking up this distinction between “co-production” and “co-creation”, Ordanini and Pasini (2008) assert that customers are the co-producers of service and the co-creators of value—because they mobilise knowledge and other resources in the service process in a manner that influences the outcome of the value proposition. Ordanini and Pasini (2008, p. 295) affirm: “Co-production means that the customer must be open, in terms of realising [his or her] existing knowledge base with the service provider: the provider can maximise the service benefits with free and open access to the customer’s knowledge and expertise.” Co-creation goes beyond this by realising enhanced value through the resources and competencies of the customer. In other words, co-creation reaches it full potential when the value proposition is applied together with the resources and capabilities of the customer.

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Gummesson (2008a, 2008b) goes beyond the notion of “customer-centricity” within the marketing concept to speak about “balanced centricity”. According to this view, all stakeholders have the right to satisfy their needs and rights, and “… businesses have to balance the interest of many stakeholders” (Gummesson 2008b, p. 315). From a network perspective, long-term relationships and well-functioning markets should be built on the balance of these needs and wants. Christopher, Payne and Ballantyne. (2002) and Mele and Colurcio (2006) also focus on the issue of value creation by stakeholders. Mele (2008, p. 3) explicitly links a network perspective with the creation of value to speak of “network value”: “By applying [a] network perspective, value creation does not proceed from bilateral relationships (such as that between a supplier and a customer); rather, it proceeds from the multilateral relationships among all the actors involved in the network……The expression network value is so the value co-created by a value-creating network.” In this perspective value co-creation is at the heart of an open source culture, where actors have full access to define value and are empowered to make their own changes and improvements to the process.

The notion of value creation from a network perspective is especially apposite to the fundamental ideas of S-D logic, which recognise the importance of collaboration in sharing and integrating resources. According to this perspective, the various actors involved (such as customers, suppliers, partners and so on) are seen as ‘resource integrators’. Indeed, S-D logic is not restricted to the role of the customer in the process of co-creation, but also includes an organisation’s partners in terms of value networks (or configurations) (Vargo and Lusch, 2008b). In a similar vein, Cova and Salle (2008) explicitly involve both the supply network and the customer network in the co-creation process. Alluding to Gummesson (2006), Cova and Salle (2008, p. 272) observe that: “… co-creation is carried out in a many-to-

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many approach between a supplier and [its] network in interaction with a customer and [its] network.”

2.3 Knowledge and relationship in innovation Knowledge management in innovation Within GD logic, the firm is the innovator in market and/or technological terms, and thus provides added value by offering new products or services to a user (Booz et al., 1982; Clark and Wheelwright, 1993). Although a long-standing debate exists within this logic about where the initial stimulus for innovation resides (between the ‘technology push’ approach and the ‘demand pull’ view), the more important contemporary issue is how the innovation occurs and realises its potential (Galbraith, 1982; Lundvall, 1988; Rothwell, 1992). The focus shifts to the “dynamic” dimension of innovation (Teece Pisano and Shuen 1997), in terms of a complex cognitive process (Nonaka and Takeuchi, 1995) that involves the efficient management of different kinds of knowledge with a view to offering a significant advantage for customers (Galunic and Rodan, 1998). Emphasising the importance of efficient knowledge management in innovation. Tidd and Bessant (2008, p. 5) contend that: “… whilst competitive advantage can come from size or possession of assets, the pattern is increasingly coming to favour those organizations which can mobilize knowledge, technological skills and experience to create novelty in their offerings.”

The provision of value to the customer is the main driver of this knowledge management through a continuous and intentional learning process that aims to ensure renewal of a firm’s competencies to meet the challenges of a changing and increasingly competitive environment (Gale, 1994; Nahapiet and Goshal, 1998; O’Connor and Veryzer, 2001). Three basic competencies are innovation enablers (Leonard-Barton,

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1995; Tidd, Bessant, Pavitt, 1997; Trott, 1998): “market competencies: the firm’s ability to understand and exploit opportunities within its market; organisational capabilities: managerial systems and routines required to transform and exploit the firm’s knowledge base; andscience/technology competencies: derived from in-house research and development (R&D) activities.”

Relationships in innovation Recent studies promote the notion of a relational view of innovation (Freeman 1991). The rationale for this approach is that the success of a firm’s innovation process is largely determined by the degree to which other players are able to integrate and coordinate different competencies with those of the firm (Powell 1998). According to this view, a firm’s innovation performance is increasingly dependent on the performance of other organisations (including its competitors) within its network. Each firm’s unique network includes activities, resources, and relationships that represent the way in which it has conducted itself over time. According to the relational/network perspective of innovation, firms learn by interacting (Nooteboom, 1999; Rogers, 2004), which thus becomes the critical and differentiating factor in innovation performance. The first cognitive studies (Webster 2004) frames innovation as a process occurring primarily within the firm, where internal capacities are a key element. This concept acknowledges the cumulative and path dependent nature of firm’s innovation processes. According to relational perspective, an interactive dimension complements the internal innovation process—whereby firms forge relationships with other enterprises and actors in their environment (Jurado et al., 2008; Roper et al., 2008). The challenge for firms in the relational perspective is to augment their own accumulated knowledge and competencies by complementing it with knowledge and competencies from external

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relationships (Colurcio et al., 2008; Jurado et al., 2008). As Ritter and Gemunden (2003, p. 745) observe, this requires a certain “network competence”, which they define as “… a company-specific ability to handle, use and exploit inter-organizational relationships”.

2.4 Value and innovation The relationship between value creation and innovation is the focus of a renewed debate in innovation studies. The marketing and management literature, describes innovation in strategic terms as the creation of superior value for the customer with the aim of gaining a competitive advantage and rejuvenating the organisation (Matthyssens et al., 2006). According to this perspective, innovation is a value-creation process that is based on a firm’s ability to make continuous improvements in its offerings (incremental innovation) or to provide entirely new ways of satisfying its customers’ needs (radical or discontinuous innovation). Pursuit of radical (or discontinuous) innovation may be a more successful innovation strategy than incremental innovation. For example, Kim and Mauborgne (1999, p. 46) refer to the Schumpeterian notion of “creative destruction” in arguing that successful innovation is about “… creating new and superior value, hence making existing things and ways of doing things irrelevant”. According to these authors, successful innovation implies a dramatic reinvention of the concept of customer value by shifting the firm’s focus from merely offering modified products or services to supplying radical new solutions to customer’s needs. In a similar vein, Tidd et al. (2008) refer to “discontinuous innovation” as a phenomenon that emerges as a result of reframing the way in which a firm thinks about its industry; it thus involves a significant change in the prevailing business model and the associated rules of the game.

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Adopting the same theoretical perspective, Reinmoeller and van Baardwijk (2005) refer to business models as service systems that exploit opportunities and create value through a combination of tangible and intangible elements. According to these authors, better business models thus develop through service innovation. Moreover, the authors contend that the dynamic development of better business models is driven by the revelation of opportunities and resources as a result of interaction. In a similar vein, the notion of “service innovation” bridges the traditional dichotomy between goods and services . Service innovation is an innovative way of creating value with intangible and dynamic resources (Vargo and Lusch, 2008a; IFM and IBM, 2007). The contribution of a service perspective to innovation studies, even in its present embryonic state, completely redefines the relationship between value and innovation. As Mele (2007b, p. 5) observes: “… in the new service logic, a firm that is engaged in innovation produces knowledge, absorbs it, and makes it available as potential value to customers, who then participate with their own competencies to realise this potential value through a process of value co-creation.”

According to this view, innovation is actually an enhanced value proposition that improves the customer’s role in value co-creation (Michel et al., 2008). Innovation is thus conceived as an exercise in asset sharing, information sharing, work sharing, and risk sharing to create value in customer–provider interactions (Grönroos, 2008). In summary, just as a general shift occurs in business away from the dichotomy between goods and services to the provision of solutions (understood as a combination of goods, services, systems, processes, and technologies integrated for a specific customer), innovation also undergoes a significant change in bridging the traditional dichotomy between incremental and radical innovation (Cova and Salle, 2007; Mele,

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2007b). Innovation is now seen in the wider context of a supplier–customer relationship, whereby firms aim to develop a continuous stream of innovative solutions to customers’ problems. The notion of innovation no longer refers to something ‘new’ in absolute terms; rather, it refers to that which is ‘new’ for a specific customer. By offering a superior value proposition to this specific customer, an innovative solution thus becomes value innovation.

3. S-D LOGIC: A POTENTIAL FRAMEWORK FOR INNOVATION Although the first S-D logic contributions offers an interesting framework in which to view innovation (Michel et al. 2008), S-D logic (at least in its original form) is somewhat deficient as a basis for a comprehensive model of innovation, mainly as a result of its focus on the notion of outside-in and dyadic value co-creation. In particular, by restricting the customer’s role in value creation to the use (or consumption) phase, SD logic fails to take proper account of the increasing involvement of consumers in the innovation activities of suppliers—including the design and development of new products, product testing, and other forms of customer support in the innovation process. These interactions between producers and consumers at different stages of the innovation processes represent an important aspect of value co-creation and coproduction (von Hippell (2005). Innovation is increasingly understood as a complex non-linear process, in which a range of resources (people, technology, organisations, and shared information) are configured and integrated in the creation of value. Customer-to-customer and supplier-to-supplier interactions become prevalent and their role goes beyond the provision of complementary competences.

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In an attempt to address these aspects in S-D logic as a potential framework for innovation, the so-called ‘many-to-many’ approach of Gummesson (2006) offers valuable insights. As noted above, the ‘many-to-many’ approach extends the notion of value-co-creation notion from a focus on the provider–customer interaction to include all other partners in a firm’s network. Normann et al. (1993) points out that the role of the customer as co-producer can best be understood in terms of a ‘value constellation’, and even Vargo and Lusch (2008a, 2008c) recently emphasise the interactive and networking nature of value creation. Based on this background, the purpose of the empirical study that follows is to frame innovation within recent developments in the evolution of S-D logic (Vargo and Lusch 2008a) and the notion of a value-creating network (Gummesson 2006; Cova and Salle 2008). The study identifies a need to widen the unit of analysis from the firm to the network, and thus to widen the notion of interaction from that of a single dyadic relationship to multiple coordinated relationships. 4. METHOD Sample The work adopted an interactive, qualitative, case-study approach to gain insights into the complex phenomena described in the conceptual framework (Gummesson, 2000, 2003). The aim was to develop theoretical insights through analysis and description of new phenomena (Baker et al., 2008) as the researchers went back and forth between theory and empirical evidence during the research process (Forsström 2005). The intention was not necessarily to reach an objective truth, but rather to create a qualitative understanding of the phenomena under investigation.

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A purposive sample of three Italian-based manufacturing firms was selected on the basis of three criteria: (i) a strong commitment to innovation; (ii) a complex offering beyond the traditional distinction between goods and services; and (iii) a record of marketing success as demonstrated by a significant increase in revenues in the preceding three years.

Data collection and analysis Multiple interviews with various managers from the sample firms gave primary data. Documentary analysis of relevant company reports, brochures, and other business literature supplemented data from the interviews. An interview guide, which is prepared specifically for this study, was structured around three main themes: (i) the firms’ innovation strategy and philosophy; (ii) the firm’s orientation to value creation for customers; and (iii) the firm’s degree of adoption of a network perspective. Referring to this third item the investigation focused on the role and the nature of the relationships’ network - even if according to the supplier’s point of view - in terms of the Bs and Cs of marketing (Gummesson, Polese, 2009): i) business to business relationships (B2B); ii) business to consumer and consumer to business relationships (B2C/C2B); iii) consumer to consumer relationships (C2C). In C2B and C2C we acknowledge the customer originated action toward businesses and the customer interaction. Data analysis was a two-stage process. First, an intra-case study was conducted to evaluate each firm’s approach to the management of the investigated phenomena. Secondly, a cross-case analysis was conducted in order to analyse and discuss

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similarities and differences among cases. The aim of this two-stage process of data analysis was to establish consistent findings across the case-study firms and thus to identify theoretical and managerial implications. FINDINGS Fiat Fiat Automobiles, which was founded in 1899, is a global player in the automotive industry. The firm played an influential role in the Italian economy in the twentieth century; however, in the present century, the company gradually became unprofitable as a result of global competition and internal problems. In response to these difficulties, a process of turnaround based on innovation was initiated in 2004 to increase the firm’s competitive capabilities. The company marketed several new models and implemented a complex re-organisation with a strong market orientation. In 2005, the Fiat Group became profitable again. The key concepts in Fiat’s reorganisation process are creativity, style, technology, and innovation. The innovation process is open, interactive, cooperative, and networked (to consumers, other partners, and the wider community). The specific case of the new “Fiat 500” model, which was launched on 4 July 2007, is typical of this innovation process. The Fiat 500 is an example of ‘retro-marketing’, which involves the launching of a new product that recalls and develops an old product that is ingrained in the culture of the consumers (Cucco and Dalli, 2008). The original Fiat 500, which had been launched on 4 July 1957, was one of the first popular small cars, especially for younger people. The car subsequently became an iconic piece of Italian automotive history, with a large community of enthusiasts who shared their interest through fan clubs, events, and

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websites. Fiat had always been aware of the general public’s affection for the original Fiat 500, and from at least 1999 the firm had begun to develop plans to tap the potential of this community support. Having worked with its suppliers on the prototype of a new car from February 2004 until May 2006 (500 days before the projected launch of the new car), Fiat initiated a promotion called “500 wants you”, with the aim of involving consumers in both product innovation and market communication. For Fiat, the “500 wants you” project was an innovative approach to understanding potential consumers’ needs, fostering expectations, and translating these into concrete solutions, such as an exercise in cooperative innovation through a dedicated website that included a concept lab, in which users could create their own cars according to their preferences while interacting with other customers (C2C) and the company (C2B/B2C). In the first phase of the concept lab (3 May–14 December 2006), company encouraged consumers to take part in the external design of the car, whereas the second phase (15 December 2006–4 July 2007) invited suggestions for the internal design. In summary, this process involved: idea generation from users; data classification and evaluation from the firm and its partners; and communication of proposals back to users to choose the best idea. This exercise in cooperative innovation continued during market testing and the launch of the vehicle, including people identifying the cars around Europe and South Africa, taking photographs, and sending them for publication on the website. It also included an international competition for the design and creation of accessories and gadgets, suggestions for a mascot, and advertising proposals.

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The company organised shows and exhibitions in thirty Italian cities to present the car to the market and it used various forms of media (including television and radio) to share stories and testimonies about experiences with the car, including a television advertisement based on historical Italian images and socio-political commentary that ended with the message: “New Fiat belongs to all of us”. The 500 wants you project is subsequently judged to have been a great success by Fiat management. As Cucco and Dalli (2008, p. 67) observe: … the platform [was] a magnet for enthusiasms, an incredible place of aggregation, an effective means of communication at the consumers’ disposal, [and] a new way to use the web within a firm’s processes. In summary, the project fostered innovative interactions among the firm, consumers, other stakeholders, and the wider community to build a brand in a network perspective (as illustrated in Figure 1).

Take in Figure 1

Intercos The Intercos Group, which was founded in 1972, is a leading global developer and producer of cosmetic and skin-care products. Ten of the leading fifteen global cosmetic companies use formulas patented by Intercos, and diversification into the skin-care market was achieved in 2006 by the groups’ acquisition of CRB, a Swiss company that develops and manufactures skincare cosmetics. The Intercos Group now operates production plants in Italy, the USA, Malaysia, and China, and has commercial offices in the USA, France, Italy, the UK, Russia, Spain, Malaysia, and China.

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A wide mix of products/services - in order to satisfy every market segment (mass market, prestige, specialty stores and direct sales) - is at the basis of Intercos’ competitive strategy: company’s aim is to be a “full outsourcer” in the Cosmetics industry.. Intercos builds its business on a huge investment in R&D, the development of quality products, and marketing innovations on both the local level and the global level. In its own documentation, the company places great emphasis on being: … innovative in every sense of the word (trends, research products production, service) and in every aspect of its organisation. Innovation in the firm is an ongoing process involving corporate strategy, capabilities development, and organisational structures. The company aims to provide a complex mix of products and services that create value for its customers through a network of internal and external actors who provide a variety of resources and activities (Figure 2).

Take in Figure 2 about here

Marketing division rules this network and it is organized in four area, three of them with specific innovation tasks. The strategic marketing department and the product marketing department are the heart of the firm’s innovation process. These departments ensure that all R&D laboratories are fully aware of market trends and customers’ requests. The operational marketing department defines the end products by ensuring that the firm’s products fit the requirements of specific market segments; indeed, the operational marketing department follows the products throughout their development, definition, manufacture, and delivery.

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All innovation processes focus on the customer’s expectations of value. To facilitate these processes , the firm has recently extended its B2B activities to encompass B2C relationships by launching a new brand of ‘Madina’ products and stores, which enables the firm to detect new trends around world and to test new formulations and product concepts. By direct monitoring of the needs of the end consumers, the firm has thus moved beyond merely responding to the explicit requirements of its business customers to also anticipate innovation and quality needs in the consumer market. As shown in Figure 2, the dynamic innovation processes of Intercos derive from the firm’s entire network, which involves a combination of B2B, B2C, and C2B communication. In seeking to enable value creation through innovation, the firm emphasises cooperation and commitment within its wide network of human resources— including vertical relationships (suppliers and customers), horizontal relationships (competitors), and transverse relationships (research centres, universities, other innovative firms). Amadori The Amadori Group, which was founded in the 1930s, is a major producer and distributor of white meat (chicken and turkey) in Europe. The company has twenty industrial plants (including feed mills, hatcheries, abattoirs, and innovative product plants) and more than thirty subsidiary firms. During 2007, the group’s turnover was more than 900 million Euros. Since its foundation, the company has always pursued innovation and quality in its food products. This long-standing commitment to innovation has been the key factor in enabling the firm to move from its rural farming roots to become a successful player in the European food-processing industry.

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The company enables value creation for its customers through continuous interaction with the market via customer surveys, which enables the firm to understand the changing consumption habits of its market. In particular, the firm recognises that many people have little time to devote to cooking and that time-saving meals are increasingly well accepted by customers. The company thus utilises inter-functional teamwork to develop new product offerings that created value for the customer—including breaded products, roasted products, pre-cooked dishes, and convenient recipes. At the beginning of the present century, the Amadory Group has adjusted its innovative vision by moving toward a service cncept of its offerings in order to satisfy more complex needs beyond the simple act of eating. The company establishes an interfunctional centre of product development in which chefs, marketers, and a panel of consumers collaborate to develop solutions that enable value creation for its customers. This way of work requires a large investment in new technology, competencies, and marketing to position the firm strategically as a provider of ‘gastronomic solutions’ (rather than mere food products). Concurrently with these developments, the company has initiated a massive advertising campaign to associate its Amadori brand with safety, transparency, and reliability as a service provider of traditional Italian quality. The innovation process of Amadori happens with the collaboration of internal and external networks with a range of partners who share a common theme of providing value for the customer (see Figure 3). These networks fosters the development of Amadori products through an integrated and cooperative production cycle that guaranteed traceability and responsibility along the entire supply chain.

Take in Figure 3 about here

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Packaging suppliers, customers, and processing firms are the main sources of ideas for the generation of new products, whereas feed factories and farms are mainly interested in the concept design and the provision of formulas, methods, and techniques to translate desired attributes into product features. The distributors concern with the launch stage of new products, although they also play some part during the concept design by providing input regarding merchandising needs. To encourage value co-creation, Amadori has recently developed a community project that enable customers to interact with the company through a website that facilitates the expression of consumer needs, the offering of suggested solutions, and the exchange of recipes. DISCUSSION The mainstream academic literature on innovation emphasises the crucial role played by knowledge and relationships in the so-called ‘cognitive-relational approach’ (Nonaka and Takeuchi, 1995; Teece et al., 1997; Freeman, 2001; Colurcio et al., 2008). As previously noted, this approach has certain affinities with the value-creation theme of SD logic. The following discussion of the case studies therefore considers the role of innovation in value creation from the perspective of S-D logic, with particular focus on two elements: (i) the role of customers; and (ii) the role of network. In the Fiat case, customers had significant involvement in the whole innovation process. Fiat’s strategy was to involve potential consumers and the wider community in every stage of the development of the new product. A multimedia dialogue was thus established with aficionados of the original Fiat 500 and potential customers of the new version of this vehicle. The cooperative innovation process was not restricted to so-

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called ‘lead users’ (that is, users with special competencies); rather, it involved ‘average’ consumers in a culture and environment similar to open source. This approach ensured that the new product development proceeded with the wider community of future users being deeply involved in the original idea and its subsequent elaboration. The involvement of these people in the co-production process enhanced the expectations of potential consumers and increased their perceptions of value. Fiat asks to the other partners to understand customer knowledge and preferences in order to be committed to them. Intercos recognises innovation as the main source of value creation, and its customers as the driving force for value-creating innovation. The whole organisation is designed around this core concept. The firm’s commitment to customers’ needs is apparent in its strategy of being a full outsourcer to provide tailor-made solutions. At every stage of the development processes—from raw materials to finished products— Intercos emphasises that innovation requires a comprehensive culture of cooperative relationships with customers and network partners. The company sees innovation process in terms of working together to co-create value. In the case of Amadori, the customer is the starting point of an innovation process that led the company to review its whole business and change its vision. Recognising the imperative of innovation, the company has moved from a traditional rural-based family orientation to a sophisticated business orientation within the food-processing industry. Company involves customers in the innovation process through their active involvement in the inter-functional centre, but the value-creation process in a wider sense is an exercise in effective cooperation involving the community and a large number of players along the supply chain.

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All of these finding are in accordance with Vargo and Lusch’s (2008a) claim that firms adopting S-D logic make value offers and facilitate interaction and value creation. The present study widens this view by pointing out that value fulfilment for the customer is not restricted to the consumption phase; rather, it can also manifest itself during value co-production as customers become involved in the innovation process. In other words, value is not only about the use of a value-generating product, but also about the resources generated through interaction between customer and provider. Applying S-D logic to innovation thus provides an opportunity for the supplier to facilitate value co-production with the customer. During the interactions that occur during the innovation process, the supplier and the customer effectively make promises to one another, and then work together to fulfil them. For the customer, such an interactive innovation process becomes a “… generator of service experience and valuein-use” (Ballantyne and Varey 2006, p. 336), and for the supplier it becomes a helpful source of knowledge about customer preferences and behaviours and an occasion to support customer’s actions. It is clearly in the interests of the supplier to facilitate interactions with customers during the innovation process, and thus providing innovative value-generating solutions by adding the provision of service to the mere provision of goods. It is apparent from the cases studied here that effective interaction requires a meaningful bi-directional dialogue through a variety of communication channels. It is also apparent that this dialogue should not be restricted to a B2C (and/or C2B) dialogue; rather, provision should also be made for meaningful C2C dialogue, thus producing knowledge from customers who are ‘learning together’ (Payne et al., 2008; Ballantyne and Varey, 2006). Such meaningful dialogue facilitates the identification of

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opportunities for co-production and co-creation of value and enables this knowledge to be applied creatively to customer solutions (Ordanini and Pasini, 2008). The findings of the present study also allow us to affirm that innovation is not only a provider concern or a customer concern; rather, it is best understood in terms of a network issue. In accordance with S-D logic, innovation can be understood as the generation of value through the integration of resources by such actors as the customer, the supplier, and other stakeholders in a network of relationships in which any one relationship can affect another. This view changes the model of innovation from that of a supplier as the innovator and a customer as the user (or perhaps the stimulus) of innovation. The revised model includes a range of other stakeholders—all of whom are not merely sources of ideas or providers of goods and services, but real co-innovators. The innovation process is thus developed by continuous interaction among a range of stakeholders who integrate their resources to co-create stakeholder value—that is, value for each of the actors in the innovation network. Consistent with Gummesson and Polese (2009), the case studies demonstrate that innovation emerges from the various contributions of the network’s members through B2B, B2C/C2B, and C2C interactions in an integrated many-to-many context. In sum drawing on the literature review and the findings of the case studies the work tried to analyse the application of S-D logic in innovation, in terms of an open innovation process in which all actors in the network can mobilise their resources to become co-innovators and co-producers of value. Such value innovation creates value for each of the actors and co-creates value for the others. Framing innovation in these perspectives moves the locus of innovation from ‘product’ to ‘value’. It enhances the concept of service and transforms the current

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understanding of value—from an understanding based on units of output to a conception based on processes that integrate resources (Vargo et al., 2008). In conclusion, positing innovation as a many-to-many phenomenon within the paradigm of service logic is in accordance with Normann’s (2001, p. 87) call: … to shift our attention from product to utilization, from product to process, from transaction to relationship. It enhances our sensitivity to the complexity of roles and actor systems. In this sense service logic clearly frames a manufacturing logic rather than replace it.

IMPLICATIONS Managerial implications Several managerial implications arise from the findings of this study. First, it is apparent that managers should become acquainted with the concept of ‘value innovation’ and the benefits to be gained by applying service logic to innovation development. Secondly, managers should extend their thinking on innovation beyond such aspects as production, engineering, and sales. They should also take into account all aspects of consumption, supplier–customer interaction, and customers’ perceptions of value creation. They should recognise that their innovation processes should assist customers to create value for themselves and other players. Thirdly, managers should recognise that innovation is not merely a concern for the firm and its customers. Applying S-D logic, innovation processes should adopt a network perspective of resource integration involving a variety of actors, including customers, suppliers, and other stakeholders.

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The following specific recommendation for managers are suggested: identify opportunities for interaction with a view to co-production and cocreation; foster interactions with customers to facilitate the acquisition of knowledge, experience, and competencies; involve other stakeholders and create a network vision to guide innovation and value-creation processes; understand the various value expectations of a network’s members and identify solutions that will satisfy each of them; and manage innovation in terms of an open culture and environment that encourages contributions and learning. Research limitations and further directions This work analyses three case studies. In the frame of the explorative aim of study, the findings can consider fitted to make an useful contribution in setting innovation in the context of S-D logic. The objective for subsequent studies is to build on this foundation by conducting further theory-generating research on the general question of whether S-D logic provides a useful framework for innovation processes. More specifically, future studies could analyse the various perspectives of different network actors regarding their expectations and potential contributions to the coproduction and co-creation of value innovation. In other words, future studies could go beyond the present study by analysing network relationships, rather than restricting the perspective to that of the supplier.

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Figure 1 - Innovation network in FIAT

B2B

Ad agencies

C2B/B2C

B2B

B2B B2B

Suppliers

Designers C2B/B2C

Consumers

Fiat C2B/B2C B2B

C2B/B2C

C2B/B2C

Retailers

C2C

Community

Figure 2 – Innovation network in Intercos

EXTERNAL NETWORK

University Innovative technology business

Customers

INTERNAL NETWORK

Product and Strategic mkt dep. Innovative company from B2B other sectors

B2C, C2B, C2C

Exploratory research dept.

B2B

Packaging dept.

AIM Continuous innovation

Trend team dept.

B2B Competitors

Applied research and color dev. dept. Technology & industrialization dept.

Trend and B2B, C2B, C2C fashion

Research Centre B2B

New equipment dept. HR Dept. B2P/P2B Hiring best people

B2B Suppliers

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Source: Intercos

Figure 3 The innovation network in Amadori

BREEDERS

INCUBATOR S

B2B B2B

FEE FACTORIE D S FARM S

B2B

COMMUNIT B2C/C2B Y

B2B

Other areas

INTE FUNCTIONA R PRODUCT CENTRE L DEVELOPMENT

B2B

PROCESSIN G FIRM S

B2B B2B PACKAGIN SUPPLIER G S

B2C/C2B

C2C

CONSUMER S B2C/C2B, C2C

DISTR BUTOR I S B2B