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Effects of Value Co-Creation on Innovation Capability: Knowledge
Sharing as a Moderator
Jaludin Janteng1, 2 and Cheng Ling Tan2
1
Labuan International Campus, Universiti Malaysia Sabah, Labuan, Malaysia
2
Graduate School of Business, Universiti Sains Malaysia, Penang, Malaysia
jaludin@ums.edu.my
tanchengling@usm.my

Abstract: In today’s competitive world, all businesses require the ability to bring new knowledge and technologies to
establish significant improvements in the production or delivery of goods and services. Innovation capability enables a firm
to develop, reshape, and reconfigure new resources and operational capabilities. Value co-creation has become
strategically crucial to anticipate innovation capability for an organization in the business community. Value co-creation
leads to the distinctive combination of ideas directly from the buyer, which, in turn, supply an excess of current ideas to
the firm. Management shall bring diverse parties together to produce a mutually valued outcome. Therefore, the
interaction and relationship management between the company and customer can be seen by applying the concept of
dialogue in value co-creation. Knowledge sharing shall be encouraged among business partners to exchange implicit and
explicit knowledge to create new knowledge. Against this backdrop, it is important to understand how technical bonds of
value co-creation link with innovation capability in organizations. It is found that there is limited evidence for knowledge
sharing as a moderator in which to strengthen the relationship between value co-creation and innovation capability. This
study aims to synthesize some details that are practical to decision makers and managers who are in charge of instructing
transformation strategies in companies. This study also emphasizes the significance of knowledge sharing that can boost
the innovation capability of firms. Numerous literature in the area of value co-creation, knowledge sharing, and innovation
capability were reviewed. The systematic article review was employed to analyze and synthesize the literature in order to
establish a conceptual framework that links value co-creation, knowledge sharing, and innovation capability. The finding of
this paper discusses the practical information to a relatively unexplored area. This study also proposes to empirically test
the model and provide awareness to the finest implementation in future study.

Keywords: ǀĂůƵĞĐŽͲĐƌĞĂƚŝŽŶ͕ŝŶŶŽǀĂƚŝŽŶĐĂƉĂďŝůŝƚLJ͕ŬŶŽǁůĞĚŐĞƐŚĂƌŝŶŐ͕ŽƌŐĂŶŝnjĂƚŝŽŶĂůŝŶŶŽǀĂƚŝŽŶ͕DĂůĂLJƐŝĂ

1. Introduction
The existence of co-creation as a method of collaboration between the customer and companies has become a
necessity in the business community. It is known as a new marketing strategy to establish a competitive
advantage. However, the effectiveness of the method in improving the innovation capability and
competitiveness in the company’s strategy continues to be an issue. Therefore, to ensure the effectiveness of
collaboration through co-creation, this method should be based on the collaboration of ideas and experiences
through knowledge sharing.

A company should change its strategy by focusing on the customer level from the company level (Kumar &
Petersen, 2013). This strategy is important for consumers, as it enables them to become involved and
contribute to the company’s strategy by creating a new idea. Consumers can optimize the effectiveness of
knowledge sharing based on the experience of using the company’s products and services. Active interaction
with companies gives customers opportunities to share new ideas, develop products and services together,
and optimize their experience (Prahalad & Ramaswamy, 2004).

The market becomes competitive due to the competition and the impact of globalization. Firms have difficulty
to compete if they are still using traditional methods. These companies must change their marketing strategies
with more focus on the customer-level to win over the competition (Lamberti & Noci, 2009). Firms should take
advantage of technology in order to easily interact with customers. There are many options to engage with
customers in social media such as through YouTube, Facebook, and Twitter. By developing interactive online
sites for the community, firms could have opportunities to communicate and exchange information with
customers. Thus, a company manages to obtain customer feedback and encourage interactive involvement.
This evolution will encourage companies to change marketing strategies to succeed in the world of global
competition (Hoyer et al., 2010). The interaction between customers and companies through social media
enables firms to create an in-depth customer experience and improve competitive position. Therefore, it is

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important for a firm to follow the trend and build an interface between the firm and customer in its marketing
strategy (Lusch & Webster, 2011).

Customers are now demanding customized and personalized products and services. They lean toward the
unique and standing out from the crowd. Therefore, firms have to change their focus from the features of
products to customer benefits. Hence, co-creation between products and customer service is a good strategy.
It has the potential to reshape interaction with all internal and external stakeholders. Although extensive
academic research has explored the concept of value co-creation and its applications in the business industry,
much less research has investigated customer interactions with innovation capability (Alves, Fernandes, &
Raposo, 2016; Jouny Rivier, Reynoso, & Edvardsson, 2017; Mainardes, Teixeira, & Romano, 2017; Ranjan &
Read, 2016). Co-creation strategies can increase supplier commitment, transparency, and trust. It leads to
increased knowledge sharing and higher supplier and customer relationship. There is also significant
opportunity to leverage the power of co-creation in an area such as dealer relations, after-sales service and
support, internal processes, and enhancing the company’s reputation for corporate social responsibility.
Therefore, co-creation is a useful tool to build a relationship and create innovation capability within an
organization.

The relationship of value co-creation and a firm’s innovation capability will continue to be a critical component
of customer-organization interactions (Petri & Jacob, 2016; Taghizadeh, Jayaraman, Ismail, & Rahman, 2016). A
firm’s innovation capability is expected to become a key criterion for a long-term business strategy. The
engagement through value co-creation of customer and companies will lead to customer satisfaction and
loyalty (Oyner & Korelina, 2016). Hence, this paper aims to address the issues mentioned above by examining
the impact of co-creation toward innovation capability through knowledge sharing. The findings of this
research are expected to support practitioners in developing a successful new marketing strategy and
increasing practitioners’ awareness. We extend and expand the existing research by proposing a conceptual
model of the effects of co-creation on innovation capability through knowledge sharing for making two
important contributions: (1) to extend the literature of co-creation, knowledge sharing, and innovation
capability; and (2) to develop and propose a conceptual framework to study the effect of value co-creation
towards firm’s innovation capability.
2. Literature Review

2.1 Value co-creation

Value co-creation is an approach in marketing study to increase value for customers and firms (Vargo & Lusch,
2008). It is an opportunity for an organization to develop a new value through co-creation of value by a
company and the stakeholders (Silva, Camacho, & Vazquez, 2013). The main objective of this marketing
strategy is to develop the interaction between the company and its stakeholder (Sjodin & Kristensson, 2012).
Moreover, value co-creation is viewed as a marketing strategy to improve business and create innovation
blueprint (Prahalad & Ramaswamy, 2004). It provides a resource to a firm to create value through interaction
between consumers and a firm to co-construct the product and service experience. It has become important
to enable capabilities for the organization in the competitive market.

Value co-creation leads to an interesting combination of ideas between firm and consumer. It will enable an
organization to collect ideas from consumer to the firm. A firm shall initiate to bring diverse parties together to
produce better ideas. Therefore, the concept of dialogue and discussion in value co-creation provides a
medium of interaction between firm and consumer. Firms should develop a supplier–customer relationship
through interaction and dialogue to strengthen the relationship in business (Payne, Storbacka, & Frow, 2008).
The development of better interaction between consumer and firm enables a firm to recognize the consumers’
experiences regarding its products and services.

In addition, the creation of value is the main paradigm in marketing by using the customer as a source of
competence. All information and value creation among consumers becomes a source of ideas to generate new
products and services (Vargo, Maglio, & Akaka, 2008; Zwick, Bonsu, & Darmody, 2008). This process can be
achieved through deep engagement and willingness to act on both sides. Therefore, value co-creation is crucial
for the transformation of the relationship between firms and consumers (Prahalad & Ramaswamy, 2004). The
continuous popularity of innovative development among customers is making firms rely on innovation
activities to satisfy their demand (Mohd Nasurdin, Tan, & Khor, 2015; Taghizadeh, Jayaraman, Ismail, &

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Rahman, 2016). Hence, firms are putting substantial effort into create values with their consumers as part of
the innovation process to attain the competitive advantages.

2.2 Innovation Capability

Innovation capability is the resource of firms, external linkages society, and creative input of individuals in the
firm (Balan, Lindsay, & Allan, 2009). These resources give a firm the ability to adopt new processes to develop
new products and services (Mohd Nasurdin, Tan, & Khor, 2015). However, the innovation itself is not easy to
implement. By the way, a firm can deal with it by focusing on its capability in term of assets, resources, and
abilities. A firm considers the innovation capability when it has specific capabilities, such as organizational
competencies, routines, and processes (Hertog, Aa, & Jong, 2010). The innovation capability will be used to
create a new resource in business, which can differentiate the company from its competitors. The firm’s
innovation capability enables a firm to offer new products and service that are related to existing products and
services (Grawe, Chen, & Daugherty, 2009). This capability allows a firm to break into new markets and reach
new customers.

Moreover, innovation capability indicates a firm’s ability to introduce new knowledge and technology, which
leads to new product development and service design. It has potential to deliver significant improvement in
the production and delivery of goods or services (Wonglimpiyarat, 2010). A firm is considered to have
innovation capability if it has the ability to develop, reshape, and reconfigure new resources and operational
capabilities. Capabilities enable a firm to transform assets into something for better service or innovative
products (Daugherty, Chen, & Ferrin, 2011). As a result, it will give a firm an edge in the marketplace.
Innovation capability gives a firm the potential to create a new resource so that the firm can differentiate itself
from the competitors (Hertog et al., 2010). To sum, innovation capability enables a firm to bring new
knowledge or technologies to establish significant improvements in the production or delivery of goods and
services. In the same way, a firm’s innovation capability is crucial in creating new and improved products and
services in the organization.

2.3 Knowledge Sharing

Knowledge management is important for an organization in the competitive market. It is a valuable resource
for an organization to sustain a competitive advantage (Tan, 2015). It is about making the right knowledge or
the right knowledge sources available to the right people or organizations at the right time. To implement
knowledge sharing, firms have to understand the user requirements. Fundamentally, knowledge sharing is a
process meant to obtain experience from others (Abdul, Pangil, Zin, & Azlina, 2016). Hence, knowledge sharing
is the practice of exchanging and disseminating ideas, experience, and knowledge with others to ensure
certain knowledge continues in a business. It is the process of transmission, communication, interaction, and
coordination of knowledge. The proper management of knowledge helps an organization to improve
organizational productivity and sustain a competitive advantage (Wang, Nidhi, & Cao, 2016). It is an activity in
which knowledge is exchanged among people, communities, customers, and organizations.

Broadly speaking, an organization utilizes two types of knowledge: explicit and tacit. Explicit knowledge is a
codified knowledge found in documents and databases, while tacit knowledge is an intuitive knowledge rooted
in context and practice. They are important to the organization to generate new knowledge, whereby a firm
should introduce knowledge sharing to the organization. Knowledge sharing can enhance organizational-based
resources and capabilities. It is recognized that knowledge constitutes a valuable intangible asset for creating
and sustaining competitive advantages. It has a significant effect on the innovation process and enhances
innovation capability (Hussain, Konar, & Ali, 2016).

However, knowledge sharing can sometimes constitute a major challenge to an organization. The challenge
comes from the difficulty of knowledge sharing among employees. Some employees tend to resist sharing
their knowledge with an organization (Abdul et al., 2016). To counteract this, an employee in the organization
must be reassured that he or she will receive some incentive for what this person shares and creates.
Effectively encouraging employees to share valuable knowledge can increase and sustain a firm’s competitive
advantages (Akhavan & Hosseini, 2016). To promote knowledge sharing and remove knowledge-sharing
obstacles, the management should change the organizational culture to encourage innovation and discover
new knowledge.

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3. Proposed Model and Propositions

3.1 Value co-creation and innovation capability

Firms rely on innovation activities to satisfy consumers’ demand. These firms typically make substantial efforts
to create value with their consumers, which is part of the innovation process and strategy (Taghizadeh et al.,
2016). The concept of co-creation enables a consumer to generate new ideas in the process of product and
service design. Moreover, the advancements of technologies enable consumers to easily interact with a firm.
The idea for innovation might be through the active interaction between consumers and the firm (Hamidi &
Gharneh, 2017). The interaction enables consumers to simultaneously play two roles as value creators and
consumers. Therefore, the influence of value co-creation on a firm’s innovation capability can be seen through
the active interaction through sharing of new ideas and consumer experiences.

In addition, value co-creation is a concept that can increase the worth of goods and services. By the
implementation of value co-creation, the interaction of a company and consumer play a vital role in deciding a
company’s innovation capability. It is declared as a part of innovation capability development. Therefore, the
researchers will examine the relationship between value co-creation and innovation capability. This study
would specifically test the influence of value co-creation and innovation capability in the service industry. This
paper proposes the following proposition:

P1: Value co-creation relates positively to innovation capability.

3.2 Knowledge Sharing as Moderator

Knowledge is recognized as a strategic organizational resource and a source of competitive advantage.
Knowledge in a firm can be developed through knowledge sharing, which is essential to an organization and
can be a source of competitive advantage. Numerous studies have attempted to explain the role of knowledge
sharing in an organization (Abdul et al., 2016; Kang & Lee, 2017; Wang et al., 2016). The application of
knowledge sharing in an organization is important, as it helps a firm to gain a competitive advantage, increase
productivity, and generate creativity (Abdul et al., 2016). By properly managing knowledge sharing, employees
can access the valuable information and deliver better performance for a firm. Therefore, it has been shown
that knowledge sharing positively relates to a firm’s innovation capability.

Moreover, knowledge sharing is a source of innovation for an organization. It comes from the creative source
of external knowledge (Kang & Lee, 2017). The adoption and application of external knowledge are critical
compared with internal knowledge sharing in the organization. Knowledge sharing from an external firm can
have an impact on the innovation process and firm performance. In addition, knowledge sharing through
interaction, communication and coordination from experts can improve a firm’s productivity, innovation
process, and sustain a competitive advantage (Wang et al., 2016). It enhances organizational knowledge-based
resources and leads to the improvement of innovation capability through the exchange of information,
experiences, and practices. Therefore, this study has come forward with the following proposition to address
the role of knowledge sharing as a moderator to the relationship between value co-creation and firm’s
innovation capability.

P2: Knowledge sharing moderates positively to the relationship of value co-creation and
innovation capability.

This study aims to examine the impact of value co-creation toward a firm’s innovation capability. To
strengthen the relationship, this study will include knowledge sharing to investigate the moderation effect
between variables. Value co-creation is about increasing value through dialogue and partnerships. Therefore,
there will be interfirm collaboration between the company and consumers. This study shall encourage
knowledge sharing among business partners to exchange implicit and explicit knowledge to create new
knowledge. Knowledge sharing is an important factor that can influence the success of organizational
operations (Rega, Naha, Mansor, & Ramayah, 2014). It is the key factor for an organization to have innovation
capability through knowledge sharing between companies and stakeholders.

To investigate the relationship between value co-creation toward a firm’s innovation capability, the
researchers propose to conduct semistructured interviews with managers of car service centers for local car
manufacturer in Malaysia. The information collected from top management perspectives will give the authors

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a clearer understanding regarding the research topic. The information is expected to provide practical
evidence to the authors in the service industry setting. The exploration in regards to real situations in an
organization will enable the authors to analyze these situations. It is expected to help the researchers to
achieve the objectives of the study. The framework of the proposed model is given in Figure 1.

Value Innovation
co-creation capability

Knowledge
sharing

Figure 1: Proposed model of the study.

4. Expected Findings
The researchers expect to find a positive relationship between value co-creation and a firm’s innovation
capability. The influence of knowledge sharing is expected to have a moderate positive relationship between
value co-creation and firm’s innovation capability. These findings are based on the previous literature
conducted by (Hamidi & Gharneh, 2017; Taghizadeh et al., 2016). Both literatures found a positive relationship
between value co-creation and a firm’s innovation capability.
5. Conclusion
In this paper, the authors have presented two propositions in which to study the effect of value co-creation on
a firm’s innovation capability and the role of knowledge sharing as a moderator. This research uses the
concept of co-creation between firm and customer to evaluate the level of a firm’s innovation capability. The
firm’s innovation capability can be improved if the firm has good dialogue, interaction, and discussion with
customers in regards to new products and service design. Knowledge sharing is important to generate creative
ideas in the competitive market. Therefore, knowledge sharing shall be encouraged among business partners
to exchange implicit and explicit knowledge to create new knowledge.

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