Key success factors for building brands through service-dominant logic and co-creation

Service -- Dominant Logic

The Key Success Factors to Building a Brand

In the Context of Service-Dominant Logic:

A Perspective on Co-Creation

The balance of power is changing

The evolution of marketing

The logic of marketing

Customer experience is the brand and co-creation is the process

The purpose of this paper is to explore brand building in the context of service-dominant logic. Brands are the sum of experiences a customer has with a firm, the firm's products and the firm's service. The firm wants the brand to reflect the core values of the company and they work hard to communicate this to the marketplace. This creates a fundamental conflict between the customer who ultimately decides what the brand stands for and firms who spend enormous resources (money, manpower and creative skills) to persuade the consumer to think their brand in a very specific way. This conflict is embedded in how the firm views the market, resources, the role of the consumer and the role of the firm; more simply put what is the firms belief system about the market and their role in it.

This paper will first examine how technology is empowering consumers and the impact it has on both the market and the firm. Specifically, we will look at the changes in the relationship between the consumer and the firm. This will be followed by an explanation of logic, its' role in a firm and how the changing technologies is creating a need for a new logic -- a service dominant logic. A firm's ability to adopt, adapt and execute this new logic will determine whether or not the firm can gain a competitive advantage. From there, we will explore value creation within the context of service dominant logic. The paper then shifts from the theoretical realm to a real world example. Of building a brand with co-creation of value. Marriott International is a pioneer in co-creation. In the early 1980s, Marriott began co-creating without the advantage of today's technologies. Now, almost thirty years later, co-creation is in their organizational DNA.

2. The balance of power is changing

Traditionally, firms designed products, manufactured them, priced them and took them to market. The firm made money at the point of exchange. In a goods-dominant environment, the firm makes all the decisions about goods and services they bring to make. The consumer can only accept, reject or settle for their goods and services. C.K. Prahalad and Venkat Ramaswamy observed: "Consumers today have more choices of products and services than ever before, but they seem dissatisfied. Firms invest in greater product variety but are less able to differentiate themselves."

When a product becomes a commodity the only levers a marketer can pull is lowering costs and lowering the price which results in consumers become price shoppers. While production costs may decrease and prices fall, consumer's needs remain only partially met and unheard. To avoid becoming a commodity, a marketer must find new ways of adding-value.

Now let's consider the digital revolution. New, ubiquitous technologies have reduced the challenges of time and distance. A person can reach their colleague in Asia as quickly as they can reach their next-door neighbor. Using Facebook and Twitter, a person can quickly establish a network with thousands of people from all over the world. Now at a click of a mouse, the consumer can now share both the positive and the negative experiences they've had with a firm, its products and services…almost instantaneously.

" Informed, connected, empowered and active consumers are increasingly learning that they too can extract value at the traditional point of exchange. Consumers are now subjecting the industry's value creation process to scrutiny, analysis and evaluation. Consumer -- to-consumer communication and dialogue provides consumers an alternative source of information and perspective. They are not totally dependent on communication from the firm. Consumers can choose the firms they want to have a relationship with based on their own views of how value should be created for them (Prahalad et al., 2004).

To fight for uniqueness in the market, firms need to befriend these consumers and take advantage of the emerging technology. Firms need to engage in dialogues with customers and prospects; they need to create two-way dialogues to build products and brands that meet the unique needs of their customers. The dialogue becomes part of the product; the product moves from a good to become an experience. Experiences are very difficult to replicate and can therefore be a sustainable competitive advantage.

3. The evolution of marketing

Prior to the 1980s, marketers ran the marketplace and product managers were the kings. Firms viewed markets as an aggregation of consumers and a place for exchange of goods. Firms were the creators of value and customers consumed the value through the purchase and use of the goods and services. "Value exchange and extraction are the primary function s performed by the market, which is separated from the value creation process (Prahalad, et al., 2004). For example, packaged goods companies (PGC) made all the decisions for the consumer. Specifically, PGCs chose what products would be put on the shelf, what flavors the product would come in, and the color, taste and texture of the item.

In the last decade, much has been made about customer involvement in making and delivering product. These actions include self-service, customization of color and other features, and having a choice of distribution and transportation options. This does not really engage the customer in product design; it engages the customer to select from a predetermined set of features. It is like a Chinese restaurant, you can order anything you want, in any combination, and at any level of spiciness -- however -- the item must be on the menu. Personalization of a product is limited by the parameters set by the manufacturers. The firm maintains complete control of the offering and the consumer is still left with the same choices -- buy, reject or settle. The firm continues to see the market as the buyers who consume the added value of their goods

If firms are serious about creating differentiation, engaging the customer and moving from a good to an experience, firms will need to get into their psyche and evaluate their underlying logic. The firm's marketers need to lead the way and redefine themselves from a goods-dominant logic to a service-dominant logic.

4. The logic of marketing

This section will examine a firm with the traditional logic of goods-dominance and compare it to a firm with the emerging philosophy of service-dominant logic. According to Dictionary.com logic is a noun meaning the system or principles of reasoning applicable to any branch of knowledge or study. Therefore, a goods-dominant firm has a producer perspective and focuses on the manipulation of raw materials into a good for sale. A service-dominant firm focuses on the utility created and used by its customers. Good-dominant firms are internally oriented and service-dominant firms are consumer oriented (Cova et al., 2007). Table 1 exhibits the fundamental philosophies embedded in a goods-dominant firm and a service-dominant firm

Table 1

Factor

Goods-dominant

Service-dominant

Market Definition

An aggregation of consumers

The locus of exchange where a firm trades goods and services with the consumer

Separate from the firm

A forum for co-creation experiences

Resources

Operand resources

Resources on which an operation or act is performed to produce an effect

Success measured by share of operand resources and share of market

Example- minerals

Operant resources

Produce effects

Resources employed to act on operand resources

Specialized competences

Role of the consumer

Consumption

Consumers are outside the firm

Value exchange and extraction

They are not a part of value creation

Consumers are informed, connected, empowered and active

Consumers chooses the firms to from which they buy

If dissatisfied, they scrutinizes the firm

Use auctions to have prices reflect utility rather than production costs

They are co-creators of value

Role of the firm

Producers

Value creators

Target and manage consumers of their goods

Control all decisions

Co-creators of value

Responsible for creating high quality interactions

Responsible for the consumer experience

Flow of communications

Firm to the consumer

Persuades consumer to buy their goods and services

Consumer is not dependent on the firm for all its information

Communications are two-way between the consumer and the firm.

Sources: (Cova et al., 2007; Vargo et al., 2004; Vargo et al., 2007; Prahalad et al., 2004)

A firm that maintains the traditional, goods-dominant logic will find themselves becoming a producer of commodities and having to competing on price. To maintain profits margins, the firm will continually need to reduce the cost of production - quite possible to a point that their goods are degraded. By staying focus on the production of goods, the firm will continue to how customer at a distance. The consumer's will never be a sufficient part of value creation; the firm will not able to innovate and will supply the market with goods and services which they may not value.

The remainder of this paper will focus on value creation and brand building in a service-dominant firm. First the process of co-creation will be defined, followed several examples of successful co-creations of the customer experience.

5. Customer experience is the brand and co-creation is the process

A firm that migrates to a service-dominant logic will move from selling a commodity to co-creating the customer's experiences. If you utilize the brand definition in the introduction portion of this paper -- a brand is the summation of a customer's interactions with a firm and their products and services - one must come to the conclusion that building a customer experience equates to building a brand (Prahalad, 2004). The job of a marketer becomes one creating positive encounters; encounters which influence the customer's ability, willingness and opportunities to co-create with firm. (Payne, 2009).

The process of co-creation is evolving. In 2004,Prahalad and Ramaswamy, describe the building blocks of interactions. To co-create, a firm needed to facilitate dialogues, create access to information, understand the risk-benefits tradeoff and be transparent in is business deals. In 2008, Vargo and Lusch created a model of value creations and service-dominant logic. It represented the movement from product focus to customer focus. It consisted of a circle divided into quarters and each quarter contained a different phase of value creation. Each quarter was labeled an internal or external force, which had impact on it. The pairs for each quarter are:

Upper left quarter: Co-create service offering & draw upon internal resources

Lower left quarter: Co-create value processes and networks & overcome internal resistance

Upper right quarter: Co-create value proposition & draw upon external resources

Lower right quarter: Co-create conversation and dialogue & overcome external resistance.

In 2009, Payne et al. built upon these earlier models to develop more complete model for co-creating the brand relationship experience. Being true to the service-dominant logic, Payne and his colleagues using an interactive research methodology, worked with senior level executive and their direct reports to create and refine this new model. The model has four elements to it: 1) the suppliers brand relationship processes, 2) the customer relationship processes, 3) the encounters between these two processes and 4) additional resources of brand knowledge, including customer to customer interactions, employee to customer interactions, stakeholders endorsements and event, channels and origination and then information about competitive brands.

Let's move from the theoretical to the actual. In interview with G. Piccirilli, a former marketing executive at AT&T, suggested that one approach to creating meaningful encounters is to establish a customer lifecycle, moving the customer from prospect to brand advocate. To do this, a firm needs to partner with an existing customer and prospective buyer to learn about their likes and dislikes at different points in the relationship. The company has a better understanding of their customer and can now create processes, which will satisfy existing customer and attract new ones.

For some products the purchasing process can be very painful, having cable services installed, switching to a new health plan and buying a car all come to mind. Customers prepare themselves to go into battle before they call the cable company, before select their insurance plan during open enrollment and when be set foot into a dealership.

Car dealers have a history of selling the same car at many different prices and because of this car dealers are thought to be the lowest form of human beings walking the earth. (Please note this isn't true of most car salesman, but there are few for which this description is accurate. This description was used to emphasis the hatred that some people have for dealers.) Customers walk into a dealership expecting to be cheated; car sales people have not earned the trust of the consumer and the consumer begrudges the thought of negotiating a price. The relationship of the seller and the by is natural flawed and complex. The customer wants to get the lowest possible price for a car and the dealer wants to get the highest price possible.

In 1983, GM set out to create a brand new automobile company. They assemble a team of talented employees and assigned them the task of creating an automobile company from scratch. They were not obligated to replicate or use existing processes. This team could design the company and its products and services in a way that would meet the consumer's needs.

When the Saturn Corporation finally launched its first automobile in 1990, it was evident that they had used a co-creation process. For example, Saturn asked people about their experiences in buying a car. Through the stories told by their potential customers, Saturn was educated on the aspects of buying a car that the prospective car buyer did not like Saturn then set out to improve the acquisition experience.

When designing the purchasing experience Saturn worked hard to make it pleasant. Dealers were trained to create a low-pressure sale environment. To eliminate aggressive sales tactics, many dealers put their sales people on salary rather than on commission. Saturn also initiated a no haggling policy: the price of a car was the price on the sticker - period. Consumers did not have to wonder if they got a good deal because all the customers got the same deal.

Improving the customer experience paid off for Saturn. Saturn lost $800,000 in 4Q90 of operations and only sold 1,881 cars. By the end of 1991, Saturn had sold 74,493 units and in 1992 sales reached 196,126 units.

One other thing that Saturn also did was to create a user community. In 1994, 44,000 Saturn owners and their families drove their Saturn's to the factory location to celebrate owning a Saturn. Dealers bonded with customers, customers bonded with Saturn managers and everyone walked away that weekend more in love with the Saturn brand. Image what Saturn could of done with this users community if they had the technology that exists today. (www.fundinguniverse.com, 2010)

In 1972, Bill Marriott, Jr. took over the role of CEO when his father stepped down from the position. Shortly after taking the helm, Bill set a goal of expanding Marriott's lodging business and selected a strategy of building a portfolio of brands that would provide lodging options to a broad range of customers. To facilitate this grow, Marriott invested in information technology. This technology was able to collect customer information to develop a sophisticated brand -- tracking studies and provide date for market segmentation analyses (Accenture, 2006).