A Framework and Propositions for Managing the Coproduction Process

A Framework and Propositions for Managing the Co-production Process Li-Wei WuDepartment of International Business,Tunghai UniversityChung-Yu WangDepartment of Business Administration,National Kaohsiung University of Applied SciencesAbstractA large body of marketing literature has focused on co-production. The basic idea behind co-production is cooperating and spending time with customers. The notion of co-production is particularly salient among high customized, contact, and credence services. As such, this study draws upon social capital and relational benefits to propose a model of co-production with which it investigates the links between co-production and relational benefits, and the factors likely to increase the level of co-production in the context of investment services. This study is expected to provide valuable insights into the role of co-production in creating value for businesses.Keywords: Co-production, Social Capital, Relational Benefits, Customer Loyalty 1. IntroductionBecause of the involvement of both the service provider and customer in the service delivery process, the service is the result of a co-production process (Bettencourt et al., 2002). Vargo and Lusch (2004) articulate that customer is always a co-creator of value. Service providers do not exist to distribute value along a value chain, but to support customers in the value-creating process. At service-dominant (S-D) logic foundation (Vargo and Lusch, 2004), the importance of various streams of marketing literature (i.e., relationship marketing and social network) is highlighted to explain how knowledge and information drive a service, how customers help co-create value, and how relationships are essential. Moreover, Prahalad and Ramaswamy (2000) describe the evolution of customers from passive audiences to active players. Accordingly, customers are actively engaged in value co-creation, either by serving themselves or by cooperating with service providers (Claycomb et al., 2001). However, empirical research on co-production in the investment-service industry is limited.Co-production is a complex process involving the integration of resources from numerous sources in unique ways (Vargo, 2009). To the extent that co-production proves to be desirable for a service provider, the service provider must come to understand its facilitating factors. Previous research indicates that social capital in a network context consists of three critical dimensions: structural, relational, and cognitive (Nahapiet and Ghoshal, 1998; Tsai and Ghoshal, 1998). The structural dimension of social capital includes social interactions (Nahapiet and Ghoshal, 1998; Tsai and Ghoshal, 1998). The relational dimension of social capital refers to assets that are rooted in these relationships, such as trust (Nahapiet and Ghoshal, 1998; Tsai and Ghoshal, 1998). The cognitive dimension of social capital is embodied in attributes like a shared vision or a shared value that facilitates a common understanding of collective goals and proper ways of acting in a social system (Nahapiet and Ghoshal, 1998; Tsai and Ghoshal, 1998). In investment service industries, generally, consultants need to conduct detailed needs assessment and present personalized proposals to customers. In such case, customer knowledge has often been considered a significant dimension of the force of the relationship between a service provider and its customers (Paulin et al., 2000). Therefore, through social capital, customers and service providers may increase the depth, breadth, and efficiency of the mutual exchange of knowledge (Lane and Lubatkin, 1998). Social capital, as a strategic resource, may exert an influence on the motivation of co-production. Therefore, this study investigates social interactions, trust, and shared value as antecedents of co-production in the conceptual model. This is interesting because it provides insight on how service providers manage customer relationships with which an increasing number of service providers are encouraging co-production. In B to B contexts, cooperation allows for creative forms of dealing with disagreements and other contingencies of the business relationships (Claro et al., 2003). In this regard, it is expected that co-production enables the customer and service provider to reduce transaction costs, and amicably resolve disagreements. For example, customers of financial services participate by providing information to their financial advisors and jointly making decisions about investment plans (Auh et al., 2007). Such co-production should benefit customers through more customization, better interpersonal friendships, and increased customer satisfaction (Chan et al., 2010; Mills and Morris, 1986; Xie et al., 2008). Moreover, as customers become more competent and experienced through co-production, the utility of consumption increases as well. The enhanced feeling of self-fulfillment through co-production should have the benefit of greater confidence (Dong et al., 2008). However, it is also remarkable that there are few empirical studies on the relationships between co-production and relational benefits in investment-service industries. The significance of this study is two-fold. First, Vargo and Lusch (2008) argue that marketing is evolving in such a way that it adopts a new logic that is service based, necessarily interactional and co-creative of value, network centered, and, thus, inherently relational. This study contributes to the relationship marketing by incorporating social capital and relational benefits into co-production. In other words, this study addresses these issues by investigating antecedents and consequences of co-production in the investment-service industries. Second, from the management viewpoint, this study is significant as it offers greater practical insight to customer loyalty, particularly with respect to the design and application of customer participation management initiatives. 2. Literature Review2.1 Conceptual FrameworkBased on the literature review, this study develops a framework linking social capital, co-production, and relational benefits to customer loyalty (see Figure 1). This framework has three main features. First, it examines the direct effects of social interactions, trust, and shared value on co-production. Second, it investigates the direct effects of co-production on special treatment, social, and confidence benefits. Third, it analyzes the direct effects of special treatment, social, and confidence benefits on customer loyalty. Special Treatment BenefitsSocial InteractionsTrustSocial BenefitsCo-ProductionCustomerLoyaltyConfidence BenefitsShared VisionFigure 12.2 Social Capital and Co-ProductionSocial capital refers to the sum of actual or potential resources embedded within, available through, and derived from the network of relationships possessed by an individual (Nahapiet and Ghoshal, 1998). Therefore, social capital consists of relationships among individuals and assets or resources that may be brought by these relationships. Specifically, this study adopts the view that social capital is more than just a structure or network; it includes many aspects of social context, such as social interactions, trust, and shared values that facilitate the actions of individuals in a particular social context (Nahapiet and Ghoshal, 1998). Bolton et al. (2003) similarly posit that enhancing social capital drives interpersonal rather than firm-level evaluations of a supplier firm. This study applies Nahapiet and Ghoshal s (1998) multidimensional construct of social capital at the business-unit level to the individual level. Co-production refers to the constructive participation in the creation and delivery process and clarifies that it requires meaningful, cooperative contributions to the process (Auh et al., 2007). Co-production enhances ability of both parties to identify what information needs to be shared and how to work more cooperatively. In other words, when a customer engages in a service providers process, each party knows the pertinent knowledge possessed by the other, helping both parties evaluate and recognize what information to share and increasing the efficiency of their coordination (Dyer and Singh, 1998). Muthusamy and White (2005) point out that co-production between organizations foster a climate of openness and reciprocity. In addition, co-production leads to increased mutual understanding (Mohr and Bitner, 1991). Such mutual understanding results in positive outcomes (Auh et al., 2007). For example, consulting services are high in experiential and credence qualities. Due to these circumstances, customers seem to be predominantly interested in the process rather than the outcomes (Karantinou and Hogg, 2009). Thus, consultants usually work in joint teams with their customers, and they co-produce the outcomes in a process of mutual learning and cooperation (Glckler and Armbrster, 2003). In the following section, the relationships between social capital and co-production will be discussed in more detail.2.2.1 Social InteractionsSocial interactions are channels through which information and resources flow and enable one party to gain access to the resources of the other party (Tsai and Ghoshal, 1998). Greater use of such channels implies increased access to the resources (Gupta et al., 1999). In addition, social interactions strengthen customer relationships by integrating activities in knowledge-sharing processes and routines. Key determinants of effective social interactions are closeness, and frequent communication and contacts (Becerra and Gupta, 2003; Hansen, 1999; Tsai, 2001). Closeness of a relationship represents the emotional intensity between two patties. Frequent contacts permit one party to know one another, to share important information, and to create a common point of view (Tsai and Ghoshal, 1998). Communication allows more interaction between two parties, thus enhancing mutual understanding between them. Social interactions facilitate transfer of tacit knowledge between both parties, thus establishing the foundation for coordination (Johns et al., 1997). Wagner and Buko (2005) suggest that social interactions are vital for the development of a stable, cooperative relationship among partners in a knowledge-sharing network. In other words, through social interaction, the diverse knowledge and expertise of individuals can be collected, integrated, and applied to the task at hand. Social interactions between the service providers and the customers increase the incidence of co-production because of their greater willingness to share information (Auh et al., 2007). Thus:H1: Social interactions will have a positive effect on co-production.2.2.2 TrustBased on the study by Morgan and Hunt (1994), trust is defined as the integrity, honesty, and confidence that one party perceives in the other. Garbarino and Johnson (1999) state that trust in an organization is the confidence in the quality and reliability of products offered. Indeed, trust is generally viewed as a critical element in the development of an enduring desire to maintain a long-term relationship (Crosby et al., 1990; Doney and Cannon, 1997; Garbarino and Johnson, 1999; Johnson and Grayson, 2005; Morgan and Hunt, 1994; and Sharma and Patterson, 1999). Trust acts as a mechanism that governs embedded relationships (Uzzi, 1996), thus facilitates mutual learning (Meeus et al., 2001). Absence of these mechanisms gives rise to difficulties in understanding each other, or to costly monitoring of the exchanges. Meanwhile, trust is a facilitator of effective, cooperative behavior in customer-supplier relationships (Dwyer et al., 1987). For example, the relationships between trust and cooperation (Lancastre and Lages, 2006; Morgan and Hunt, 1994; Payan and Svennson, 2007) have been empirically verified in channels research. Trust facilitates collaborative behaviors and collective action in the absence of explicit mechanisms to foster and reinforce those behaviors (Coleman, 1990). With trust, it is more likely that customers and service providers share information and create constructive, creative dialogues around making sense of the information they share to the benefit of both parties (Selnes and Sallis, 2003). In other words, trust enables an environment of co-production that can benefit both customers and service providers.Thus:H2: Trust will have a positive effect on co-production.2.2.3 Shared valuesShared value is identified as a shared code or paradigm that facilitates a common understanding of the collective objectives and the proper ways to act within a social system (Nahapiet and Ghoshal, 1998). The underlying reason is that psychological similarities directly contribute to the quality of interpersonal commercial relationships (Iacobucci and Hibbard, 1999). Shared values also describe the extent to which goals, policies, and beliefs held by the exchange parties are consistent or compatible (Morgan and Hunt, 1994). In such cases, a firm is perceived to be acting for the best interest of its customers and by the way the firm treats its customers (Lacey, 2007). Furthermore, shared value can be a cue for expecting the other party to facilitate ones goals. Understanding mutual motivations also makes it easier to predict future behavior. When a service provider and a customer have the same perceptions about how to act with the others, they can avoid possible misunderstandings in their communications and have more opportunities to freely exchange their ideas and resources. This in turn helps them to see the potential value of combining and exchanging resources (Tsai and Ghoshal, 1998). In contrast, differences in any of these may eventually lead to conflicts among participants and to a possible dissolution of the co-production effort (Etgar, 2008). Thus: H3: Shared values will have a positive effect on co-production.2.3 Co- production and Relational BenefitsRelational benefits are defined as those benefits customers receive from long-term relationships above and beyond the core service performance (Gwinner et al., 1998). Specifically, Gwinner et al. (1998) suggest that these benefits are a result of long-term relational exchanges with service firms and can be categorized into three distinct benefit types: confidence, social, and special treatment. Customers engage in co-production to achieve relational benefits. The following section is devoted to their discussion. 2.3.1 Special Treatment BenefitsSpecial treatment benefits refer to price discounts, faster service, or individualized additional services that customers receive (Gwinner et al., 1998). Special treatment benefits exist above and beyond the core service provided. Generally, customers strive to make products match their preferences as closely as possible. This may imply that customers want delivery of products that are distinctly different from those delivered to other customers. Co-production increases flexibility of two parties in dealing with each other and tends to reciprocate and adapt to the needs of customers. In such cases, customers may also decide to engage in co-production to achieve the actual degree of customization (Etgar, 2008). Similarly, co-production allows customers to provide direct input into the service provision, make more choices, and work with the service provider to create higher levels of personalization (Auh et al., 2007; Schneider and Bowen, 1995). With co-production to reduce transaction costs and prevent opportunistic behaviors, customers feel comfortable in developing relationships that could enhance their economic performance. Thus:H4: Co-production will have a positive effect on special treatment benefits.2.3.2 Social benefitsSocial benefits pertain to the emotional part of the relationship and are characterized by personal recognition of customers by employees, the customers familiarity with employees, and the creation of friendships between customers and employees (Gwinner et al., 1998). Social benefits are especially relevant in financial service industries where a high level of interpersonal contact exists between customers and employees (Chan et al., 2010). Every service encounter between employees and customers represents an opportunity to co-create relational values for both parties (Fleming et al., 2005). Customers and employees could co-create social benefits through their sense of enjoyment and by building relationships. In other words, co-production creates social benefits, such as enjoyment of sharing some activities with persons of similar interests and desires (Berthon and John, 2006). Thus:H5: Co-production will have a positive effect on social benefits.2.3.3 Confidence benefitsConfidence benefits describe the resource relief experienced by customers in established marketing relationships as a result of feelings of reduced anxiety and confidence in the provider, and knowing what to expect (Gwinner et al., 1998). In other words, customers display of confidence benefits in the firm results from reduced uncertainty and vulnerability (Halliday, 2004). As the level of co-production grows, customers gain a better understanding of their roles and service procedures, enhancing their knowledge and ability. Thus, they will function more efficiently and productively (Dong et al., 2008). On the other hand, customers may experience delight in participation because it leads to a greater sense of control over the service process and the final outcome (Schneider and Bowen, 1995). As co-production increases customers knowledge and control of services, it shifts more power to customers (Ouschan et al., 2006; Prahalad and Ramaswamy, 2000). Co-production provides more opportunity to monitor behaviors and decreases the risk associated with making specific investments. Thus:H6: Co-production will have a positive effect on confidence benefits.2.4 Relational Benefits and Customer LoyaltyCustomer perceptions of these benefits have been shown to be positively related to loyalty attitudes, positive word of mouth, repeat patronage intentions, and customer satisfaction with the service provider (Gwinner et al., 1998; Hennig-Thurau et al., 2002; Yen and Gwinner, 2003). Special treatment benefits help customers create an emotional attachment, and thus influences their commitment, to the firm (Rust et al., 2004). That is, special treatment benefits serve as switching barriers and can result in increased loyalty (Selnes, 1993). Thus, Goodwin and Gremler (1996) suggest that social benefits are positively related to customer loyalty. Berry (1995) contends that social bonds between customers and employees lead customers to have higher levels of commitment to the organization. Similarly, rapport between customers and employees has been found to be significantly related to loyalty intentions of customers (Gremler and Gwinner, 2000). Gwinner et al. (1998) argue that greater levels of confidence benefits in the interaction result in lower anxiety concerning the transaction and thus greater loyalty. Thus:H7: Special treatment benefits will have a positive effect on customer loyalty.H8: Social benefits will have a positive effect on customer loyalty.H9: Confidence benefits will have a positive effect on customer loyalty.ConclusionsService dominant logic implies co-creation of value in collaboration with and learning from customers, and being adaptive to individual and dynamic needs (Vargo and Lusch, 2004). Therefore, this study attempts to build on the existing relationship marketing theory by providing linkages between key motivations regarding why customers and service providers co-create value in marketing relationships and customers are loyal to the