Coevolving Innovations

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Coproduction, interactive value, offering, value constellation

Posted on May 15, 2008 by daviding

In the pursuit of gaining a stronger understanding of a science of service systems through systems science, I’ve been working my way through the works of Richard Normann, Rafael Ramirez and Johan Wallin. There’s a long evolution of thought there, with a depth that may not be obvious to readers who aren’t systems scientists. Thus, phrases such as coproduction, interactive value, offering and value constellation have a specific meaning within the systems science community that the layman may not appreciate. Let me try to bring together some of the ideas, across the references.

  • 1. A service system includes a supplier with a customer (and possibly subcontractors) as coproducers of outcomes
  • 2. Interactive value is actualized not in coproduction of the supplier with customer, but in coproduction of the customer with his/her customer / counterparts
  • 3. Offerings are interactions that provide benefits in the form of (a) physical product, (b) service and infrastructure and (c) interpersonal relationship
  • 4. An offering can be either an output of coproduction, or input into coproduction
  • 5. A value constellation includes the supplier, customer and subcontractors as coproducers

The systems flavour comes out not only in recognizing parts within the service system, but in emphasizing the interactions between parts. It’s worth re-examining these writings in the context of a new science of service systems.

1. A service system includes a supplier with a customer (and possibly subcontractors) as coproducers of outcomes

Ramirez, as a graduate of the Social Systems Science program at the University of Pennsylvania, spent a few years in direct contact with Russell Ackoff. In systems theory, coproduction is one type of producer-product relation, in contrast to a cause-effect relation. The most rigourous formalism related to coproduction takes 5 pages to build up the following definition in Ackoff & Emery (1972):

2.31. Coproducers: two or more objects, properties and/or environments that are producers of the same product.

Since no producer is ever sufficient for its product, every producer has at least one coproducer. The set of all coproducers of a product y is the cause of y, since the set is sufficient as well as necessary for y. [p. 23]

At the most basic level, a service system can’t be just a supplier. A service system has to have a coproducer, i.e. a customer.

To be rigourous, there’s a fine distinction making the linkage between action, product and outcome, in Ackoff & Emery (1972):

2.40. Outcome: the product of an individual’s or system’s action.

In other words, the outcome of an individual’s or system’s action is a change in that individual or system, or its environment, which is produced by that action. [p. 26]

The distinctions between cause-effect and producer-product are expressed less mathematically in Ackoff (1981).

As Singer (1959) and Ackoff and Emery (1972) have shown, the view of the universe revealed by viewing it in terms of producer-product is quite different from that yielded by viewing it in terms of cause-effect. Because a producer is only necessary and not sufficient for its product, it cannot provide a complete explanation of it. There are always other necessary conditions, coproducers of its product. For example, moisture is a coproducer of an oak along with an acorn. These other necessary conditions taken collectively constitute the acorn’s environment. Therefore the use of the producer-product relationship requires the environment to explain everything whereas use of cause-effect requires the environment to explain nothing. Science based on the producer-product relationship is environment-full, not environment-free.

A law based on the producer-product relationship must specify the environment(s) under which it applies. No such law can apply in every environment, because if it did, no environmental conditions would be necessary. Thus there are no universal laws in this view of the universe. [p. 21]

While mechanical systems are usually modeled as cause-effect, a service system is a social system. In the creation of value, the supplier and customer take action together as coproducers of an outcome. Other third parties (e.g. subcontractor) may also be coproducers. A cause-effect relation may exclude inputs and outputs insignificant in one environment, but significant in another. As an example in a service system, autopilot is now standard on all commercial aircraft, coproducing air travel with a complement of passengers. Arriving at a destination, however, is rarely done without a flight crew as a coproducer, because all of the inputs and outputs of each journey are neither exactly the same not foreseeable.

2. Interactive value is actualized not in coproduction of the supplier with customer, but in coproduction of the customer with his/her customer / counterparts

There’s a danger in using the phrase value-creating system, in the intimation that the value might be in the system itself. In any discussion of creating value, we should be careful to ask: value for whom? From a system approach, the value isn’t in the parts, but in the interactions between the parts, as described by Ramirez and Wallin (2000):

Facilitating customer value creation is, within the co-productive point of view, the raison d’être for a firm.

This perspective shifts the focus of strategic attention from actor or ‘activity’ to interaction. [p. 47]

It’s not just the customer, nor is it just the supplier. It’s the interacton between the two. Value is perceived by the customer, not in the customer-supplier coproduction, but yet another relationship beyond.

How is value produced from the point of view of the customer?
[… the] actualization of value takes place — that is, value is actually manifested — in the actual relationships between a customer and his or her customers or counterparts. In other words, for customers, value is not ‘added’ in the interaction between customer and supplier (when the customer buys [a white] shirt), but in the interaction between the customer and the customer’s customer or counterpart (when they buyer wears the shirt and her family and others see it on her). In co-productive terms, value is manifested thanks to the ‘enabling’ which the supplier brings to the customer’s own value creating activity. By ‘enabling’ we mean ‘supporting’ or ‘making possible’. [….]

It is thus not at the interface with the supplier that value is manifested for a customer, but at the interface between the customer and the customer’s customer or counterparts. [p. 43]

In this discussion of value, the word actual isn’t chosen lightly, but instead refers to the action that takes place.

Rather than being objective or subjective, interactive value is, in fact, ‘actual’. It is ‘actual’ in the sense that it requires action on the part of both the customer, and his or her customers, and supplier for the value to become (actually) possible. Once the actions take place, they become facts. Actual value is thus dependent on ‘action’ and interaction, which upon taking place ‘actually’, becomes ‘factual’.

With this understanding of customer valuation, the notion of ‘end customer’ — a customer at the end of the value chain that passively receives the value produced by the supplier — has lost its significance. Somebody buys an offering, seeking to co-create value with others, for themself, for the other, and/or for third parties. We buy in order to create value, with others or in relationship to them. And we see value-creating opportunities, which guide much of our buying. [p. 45]

An objective view of value might suggest the monetization of the product, e.g. the price tag. A subjective view of value has been extensively studied in economics, as ordered preferences in utility theory that an individual can make, but can’t be aggregated across a group. This interactive view of value gives a phenomenological spin, where a system is not independent of its environment.

3. Offerings are interactions that provide benefits in the form of (a) physical product, (b) service and infrastructure and (c) interpersonal relationship

I am intrigued that the definition of an offering has been a living system, developing and evolving over time. The idea was first introduced in Normann and Ramirez (1994):

… the production, or rather co-production, of value in the emerging service economy is manifested in offerings, to which several actors contribute by performing specific activities. The offering is the physical and ‘in-person(s)’ embodiment of assets made up of knowledge and experience, in themselves the result of myriad activities performed by many people dispersed in time and space. Assets and resources imply the storage of activities which have been configured for a particular purpose, for a particular actor in a given location at a given time. [….] [… in] the final analysis, whether customers buy a ‘product’ or a ‘service’, they really buy access to resources. [pp. 49-50]

Six years later, the definition of offering is made much more explicit to include physical products, services, information, and — in a new extension — interpersonal relationships, in Ramirez and Wallin (2000).

… the offering is here defined as ‘a limited set of focused human interactions which can, and is intended to, generate positive exchange and customer value.’ This definition acknowledges that the offering can provide benefits to the customers not only in the form of physical products, but also in the form of service transactions, and/or usable or new information. Normann and Ramirez (1984) argued that in any case, obtaining value from a good always also required the service and information aspects of the offering. No such thing as a ‘pure good’ exists. Nor is there such a thing as a ‘pure’ service, which can be valued independent of the use of a good.

Defining the offering as a set of interactions extends the Normann and Ramirez view of an offering to also include access to — or enhancement of — relationships. These relationships may be formed in the selling and buying activities, or later, as customers use the offerings with others. Particularly in industrial marketing, such relationships are normally .now an explicit part of the ‘package of benefits’ that the purchaser gets access to upon acquiring an offering. [p. 58]

A diagram helps to illustrate the offering as a delivery package in three dimensions: physical product content, service and infrastructure content, and interpersonal relationship content.

2000_Ramirez_Wallin_PrimeMovers_Figure3.2.jpg
Figure 3.2 The three-dimensional offering

… it is useful to examine the offering in terms of a three-dimensional activity package (Figure 3.2). The three axes are hardware (or the ‘physical product content’ of the offering), software ( the ‘service and infrastructure content’), and ‘peopleware‘ (the interpersonal relationship or ‘people content’).

  • The physical content of the offering consists of elements such as the core product, the packaging, the quality and dependability of the good and its material components, the product range, etc.
  • The service content includes distribution, technical support, product modifications, customer training, on-line advice, troubleshooting, warranties and other trust-supporting insurance aspects, information brochures, brand reputation, complaint handling, invoicing, integrated information systems, etc.
  • The people content covers issues like long-term partnerships, interpersonal trust, reputation, human resource co-development, etc. [p. 58]

… different customers will emphasize different axes of the offering. [pp. 58-59]

In the above paragraph, it’s important to make the distinction between service and service system. A service system includes goods, services and relationship.

To demonstrate how packages of offerings can be shaped in different ways, an example is provided by Ramirez and Wallin (2000):

In co-production terms, the value-creating potential along each of the dimensions of the offering — physical, service, or people content — depends on the value-creating system of the customer. Two customers from the ‘same’ segment may have completely different value-creation systems, and thus view the elements of the ‘same’ offering differently. Take, for example, General Motors (GM) and Toyota. Toyota tries to develop long-term partnerships with its suppliers. General Motors has historically been more transaction focused, and long-lasting relationships have not been seen as a worthwhile goal. As customers (of a supplier’s offering), GM and Toyota would have radically different measurements on the ‘people content’ axis, as depicted in Figure 3.3.

2000_Ramirez_Wallin_PrimeMovers_Figure3.3.jpg
Figure 3.3 Optimized offerings for GM and Toyota respectively

In the many debates about the “new” service economy, I don’t recall mention of interpersonal relationships. This addition to the definition of offering is significant.

4. An offering can either be an output of coproduction, or an input to coproduction

Since the service system can be seen as having multiple interactions, discussing an offering becomes a question of which interaction is in current focus. An offering can be seen as either an input or an output in Ramirez and Wallin (2000):

Offerings are the output produced by one (or several) actor(s) creating value — the ‘producer’ or ‘supplier’ — that becomes an input to another actor (or actors) creating value – the ‘customer’. [p. 47]

This is further developed — but seems to be incomplete, later in the book. The text following the diagram isn’t as clear as other parts of the book, so instead of just extracting content, I’ll try to make sense of the diagram in Ramirez and Wallin (2000):

2000_Ramirez_Wallin_PrimeMovers_Figure5.4.jpg
Figure 5.4 Alternative views on how offerings and customer relationships interact [p. 141]

In industrial logic, an offering is viewed as an output and customer value is created through transactions. The business model would be oriented towards production cost reduction, i.e. more and cheaper cars. In the automobile industry, this was demonstrated in Henry Ford’s zeal for maximum production efficiency to offer customers cars in “any color, as long as it’s black”.

In service logic an offering is viewed as an output, and the customer value is created through relationships. The business model would be oriented towards customer satisfaction, i.e. providing different models in response to customers going through their life cycles. In the automobile industry, this was demonstrated by General Motors offering multiple models and brands so that customers could be retained.

In self-service logic, an offering is viewed as an input, and customer value is created through transactions. The business model is oriented towards independence and convenience maximization. In the automobile industry, this is demonstrated in offering cars for sale over the Internet. A customer is free to search for the model, features and price he or she desires, without the assistance of a salesman. Presumably, the commission not paid to a salesman would contribute towards a lower price.

In partnership logic, the offering is viewed as an input, and customer value is created through relationships. The business model is oriented towards value co-development. Auto sharing in urban centers could be an example of this business model. Individuals can join a cooperative that enables booking a time slot of a few hours for one of many cars parked at distributed locations across a city. The customer can walk or take public transportation to the shared automobile, and is responsible for recording mileage and refueling. The supplier monitors demand, ordering more vehicles as required. The customer and supplier are partners in this enterprise.

These four logics could use a little more thinking. I haven’t been able to locate more writing by either Ramirez or Wallin on this.

5. A value constellation includes the supplier, customer and subcontractors as coproducers

With the ideas of coproduction and interactivity as foundations in the service system, naming the value constellation is relatively straightforward in Ramirez and Wallin (2000):

Value constellation designs are based on the deployment of appropriate capabilities. These capabilities are put together by a supplier in ways that result in the customer-specific, customer-appropriate value-creating offering which enables these very customers to create value. [….]

Based on this we can define value creation as follows:

Value creation is the process of co-producing offerings (i.e. products and services and information and relationships) in a mutually beneficial seller/buyer relationship. This relationship may include other actors such as sub-contractors and the buyers’ customers. In this relationship, the parties behave m a symbiotic manner leading to activities that generate positive values for them. The actors brought together to interact in this process of co-producing value form a value constellation.

Value constellations are constantly changing. A firm designing or co-designing these must therefore have a management process to take care of its positioning within its value constellations. This constellation management process can be defined as follows: [p. 62]

Constellation management is the management process whereby the firm (explicitly or implicitly) makes decisions on how to create value for itself and for and with customers and other possible actors in the form of offerings. It does this through value constellations. It takes into consideration time, the larger environment, customers, suppliers, competitors and other stakeholders, as well as other resources. Constellation management requires the fim to gather and interpret data; to make, communicate, implement, monitor, and adjust decisions about tasks and resource allocations; and measure and compensate performancein respect of its present and future offerings. [p. 63]

There’s specific content about the firm as an open system that develops the function of a business organization to a greater extent. This is consistent with the systems approach throughout the body of work, so the interested reader can order his or her own copy of the book!

Epilogue

I had previously written about the systems thinking inside the work of Ramirez and Wallin, after I had met Johan Wallin at a conference in Berkeley. I hadn’t looked at the writing in the cleaner context of a science of service systems, as I am now. I’m happy (and relieved) that the models they’ve developed have an extremely deep rigour, and stand up well as my research context is shifting.


References

Ackoff, Russell L. 1981. Creating the corporate future : Plan or be planned for. New York: Wiley.

Ackoff, Russell L., and Fred E. Emery. 1972. On purposeful systems. Chicago, IL: Aldine-Atherton.

Normann, Richard, and Rafael Ramirez. 1994. Designing interactive strategy: From value chain to value constellation. Chichester, England: Wiley.

Ramirez, Rafael, and Johan Wallin. 2000. Prime movers: Define your business or have someone define it against you. Chichester, England: Wiley.

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