Pge-M2-Str-0644 2223 Svcce 03

Course: Sustainable Value Chains & Circular Economy
2223_S01_PGE_M2_STR_0644_E_D_BOD_TSS
Module 03: Co-creation of value as new
business paradigm
by Joerg S. Hofstetter
Associate Professor, KEDGE Business School
President, ISVC
Co-creation of value as new business paradigm
Agenda
• Definition of value and values
• The intellectual origins of the value chain
• Value co-creation and service dominant logic (SDL)
• The experience economy
• The combination of SDL and the experience economy
Sustainable Value Chains & Circular Economy : 03-Co-creation of value as new business paradigm, © Joerg S. Hofstetter, 2022 Slide 2
Learning objectives
• Students understand the concept of value and value chains
• Students are clear about the limitations of the current paradigm
• Students know about the approach of value co-creation, integrating the beneficiary
• Students are aware of the need for aligned values in value chains
• Students are familiar with the experience economy
• Students understand the potentials offered by the experience economy to handcrafted

value chains and circular economy
Welcome case
What is value
Value refers to:

• the importance, worth, or benefit (e.g. the value of knowing this), or
• the amount of money that can be received for something; the worth of something
in money.
Value is:
• attributed in a process (“valorization”),
• subjectively assessed, and
• made explicit by personally judgements.
Values refer to the beliefs that people have about what is right, wrong, and
most important in life, business, etc. which control their behavior.
Values are contingent, more than subjective.
The origins of the value chain
The guiding idea for a value chain model refers to the process perspective on production,
turning basic materials into final goods.
Sharing of labor, specialization of most economic actors, and the massive use of
assembly lines led to an understanding of value chains consisting of many individual
steps that each add a portion of value, and which are getting their share on the profit
accordingly. The value added tax systems reflects this from the legal standpoint.
Value creation is considered linear, sequential and unidirectionally transitive.
While Adam Smith made distinction between productive and unproductive work, with only
the first contributing to wealth accumulation. Porter later referred to primary and
secondary (or support) activities. Some work or activity adds value to the good in
production while others enable or facilitate this work.
Interestingly, the on-average most profitable work is not a primary activity: financing and
financial management. Competition for limited capital still is the major concern.
The value concepts in the value chain
• Availability-to-exchange value: The service rendered when a good or service is

available and the opportunity for an exchange arises.
=> providing the capacity and capability to deliver to the moment of exchange.
• Value-in-exchange: The service rendered in the transaction of the physical item.

=> the relative proportion with which a good / service exchanges for another one
• Availability-to-use value: The service rendered by having access to a good or service

when use is desired.
=> buffering between the moment of exchange and the moment of use.
• Value-in-use: The service rendered as the item is used, also termed utility value.
• Value-in-context: The service rendered has contingent value, with the valuation
depending on situation, context and institution.
• https://www.cambridge.org/core/journals/business-ethics-quarterly/article/stakeholder-theory-value-and-firm-performance/B84D07B5B6241F83EC7D904E28B21015
• http://onlinelibrary.wiley.com/doi/10.1002/(SICI)1097-0266(199901)20:1%3C49::AID-SMJ20%3E3.0.CO;2-2/abstract
Traditional goods-dominant logic
• In the goods-dominant logic each value chain participant exchanges output units (i.e.
goods) in dyadic buyer-supplier relationships.
• Value chains are understood as a sequence of value adding steps, each run by a value
chain participant, that are linked by discrete dyadic exchanges.
Goods-Dominant Logic: value is embedded and determined in production (buy to consume)
value build-up (storage of utility) value destruction
Related work evaluated in context with LOG-HSG
production sale/purchase consumption
Traditional goods-dominant logic
• The purpose of economic activity is to make and distribute things that can be sold.
• To be sold, these things must be embedded with utility and value during the production
and distribution processes and must offer to the consumer superior value in relation to
competitors’ offerings.
• The firm should set all decision variables at a level that enables it to maximize the profit
from the sale of output.
• For both maximum production control and efficiency, the good should be standardized
and produced away from the market.
• The good can then be inventoried until it is demanded and then delivered to the
consumer at a profit.
https://doi.org/10.1509/jmkg.68.1.1.24036
Group work: Expected returns in value chains
Please discuss: What benefit are companies in value chains looking for?
• A multinational company traded on major stock exchange
• An unknown start-up company supplying a world renown multinational company
• An unknown start-up company supplying an unknown company
• An exporter in a developing country supplying a world renown multinational company
• A cooperative of smallholders in a developing country supplying a company in a G7

country
• Fell free to add further examples.
Critique on the traditional goods-dominant logic
• The consumption of a good may mean its destruction, but the use of the good enables
the user to achieve a desired end, and thus create or receive value. The consumer
becomes a factor of production.
• The idea of each production step adding value neglects situations when a step actually
harms the good or turns the good into a risk for the consumer.
• Services are not well captured by the value chain, often considered to generate too
little value
• Some values can not be measured or monetized.
Service dominant logic: Conceptual transitions
Goods Dominant Logic Transitional Logic Service Dominant Logic

Goods Services Service
Product Offerings Experiences
Feature / attribute Benefit Solution
Value-added Co-production Co-creation of value
Value-in-exchange Value-in-use Value-in-context
Financial feedback /
Profit maximization Financial engineering
learning
Price Value delivery Value proposition
Equilibrium systems Dynamic systems Complex adaptive systems
Adapted from: Lusch and Vargo (2006), “Service Dominant Logic: Reactions, Reflections, Refinements” Marketing Theory 6(3), 281-288.
Service dominant logic: Integration of resources
Service-Dominant Logic: value is co-created in networks and determined by the beneficiary
Service
Resource application co- application Resource

integrator of operand creation of operand integrator
"firm" resources of value resources "customer"
Related work evaluated in context with LOG-HSG
Service
= Resource integrator = Service exchange = Set of operand resources in a value network

Source: extended from
Vargo (2008b), p. 214
= Value network = Application of operand resources = Service ecosystem or market
When the resources of each actor meet at an intended time and location,
value is co-created by exchanging service and integrating resources.
SDL Axiom 1
• Axiom 1: Service is the fundamental basis of exchange.
• Service is the application of specialized competences (knowledge and skills) through

deeds, processes, and performances for the benefit of another entity or the entity itself.
https://doi.org/10.1509/jmkg.68.1.1.24036
• Indirect exchange masks the fundamental basis of exchange (e.g. driven by

specialization and organizational complexity).
• Goods are a distribution mechanism for service provision (tangible products can be
viewed as embodied knowledge or activities). “People want goods because they
provide services.” (Norris)
• Operant resources (i.e. resources that produce effects, e.g. knowledge) are the
fundamental source of strategic benefit (e.g. competitive advantage).
• All economies are service economies (as opposed to output classifications).
SDL Axiom 2
• Axiom 2: Value is co-created by multiple actors, always including the beneficiary.
• Value co-creation refers to the actions of multiple actors, often unaware of each other,
that contribute to each other’s wellbeing. At least in human systems, which are
characterized by specialization and thus interdependency, value is always co-created
through the integration of resources provided by many sources.
• Actors cannot deliver value but can participate in the creation and offering of value
propositions. The acceptance of value propositions implies a continuing role by the
associated actors, whether afforded through resources provided directly (e.g., inter-
personally) or impersonally (e.g., through a good). Value propositions are probably
more appropriately considered narratives of value potential that are co-created among
multiple actors, including the provider and beneficiary.
• A service-centered view is inherently beneficiary oriented (by definition of service) and

relational (caused by co-creation of value).
SDL Axiom 3
• Axiom 3: All social and economic actors are resource integrators
• Organizations exist to integrate and transform microspecialized competences into

complex services that are demanded in the marketplace.
• The context of value creation is networks of networks (resource integrators).
• All social and economic actors operate in service ecosystems – which are relatively
self-contained, self-adjusting systems of resource-integrating actors connected by
shared institutional arrangements and mutual value creation through service exchange.
SDL Axiom 4
• Axiom 4: Value is always uniquely and phenomenologically determined by the

beneficiary.
• Value is idiosyncratic, experiential, contextual, and meaning laden.
SDL Axiom 5
• Axiom 5: Value co-creation is coordinated through actor-generated institutions and

institutional arrangements.
• Institutions (i.e. humanly devised rules, norms, and beliefs that enable and constrain
action and make social life predictable and meaningful),
• higher-order, institutional arrangements (i.e. sets of interrelated institutions, sometimes
referred to as institutional logics) and
• the process and role of institutionalization
are the keys to understanding the structure and functioning of service ecosystems (i.e.
human systems and social activity, such as value co-creation, in general.)
Group work: Value attenuation
We have a value chain for a cotton t-shirt sold with a sustainability brand promise:
organic cotton farming, low pollution and respect for workers’ human rights.
Consider company A, dying the cotton clothes, is using a specific chemical and does not
tell its customer about it. This chemical causes irritations in the respiratory tract of its
workers, but also of the workers who in later stages of the value chain work with these t-
shirts.
What is the value contribution of company A to the other companies that are port of this
value chain?
From consumers to beneficiaries
In G7 nations a growing share of the population (particularly young generations) consider

life as opportunity to make and benefit from different experiences.
These people no longer look for the most efficient way to fulfil their needs, but to learn
and further develop their personality and evolve on their needs.
This dynamic understanding of personality and needs causes people to seek for :
• guidance instead of simplicity,
• changes instead of repetitiveness,
• intangibles instead of tangibles.
Digitalization supports this trend further, enabling experiences with less deployment of
material and less need for travel to specific locations.
The changing self-image of beneficiaries
The realms of experience
Group work: ?aaS
Philips and its daughter Signify communicate strong commitment to the circular economy.
The company has launched an offer called “Light-as-a-Service” (LaaS). Clients now pay
for the lighting in lux per hours, but no longer for the illuminants or the used power. It is in
Signify’s own interest that its goods are cost effective, require only low maintenance and
low power, and damaged goods can be recycled.
A group of recently hired employees now challenges LaaS with their idea: “Ambience-as-
a-Service” (AaaS). They argue that light contributes strongly to ambiance and that human
productivity depends on ambiance. Ambiance is altered not only be qualities of the
illuminants, but also by the lamps and their position.
What is your judgement about the prospects of AaaS (versus LaaS) in terms of appeal to
clients, sustainability, profitability etc.?
Case study: Barry Callebaut
Barry Callebaut is one of the world’s dominant companies for chocolate and cocoa
products. With its strategic plan “Forever Chocolate” the company wants to make
sustainable chocolate the norm by 2025.
Over the past 5 years, the relationships with most cocoa suppliers have been turned from
price-focused arms’ length short-term relationships into quality development-focused
cooperative long-term relationships.
As usual in the cocoa sector, the company buys from local intermediaries who hold the
contact to the cocoa farmers (mainly smallholders). Nevertheless, Barry Callebaut wants
to improve the conditions at the smallholders – to ensure human rights, that farmers see
a future in cocoa farming, and to further develop cocoa quality.
Nestlé, one of Barry Callebaut’s major customers, has a similar agenda that is aligned
with the Forever Chocolate program.
Discuss how Barry Callebaut should interact with their suppliers and the smallholders to
ensure they realize their objectives.
Summary
• The paradigm on value, value adding and value chains only fits a small portion of the
economy.
• Considering value at different stages allows to better identify real benefits.
• The user or beneficiary is a key contributor to value co-creation whose needs and
objectives are often not well understood.
• The experience economy offers an interesting route to integrate the SDL paradigm as
both put the beneficiaries’ objectives center stage.
© Joerg S. Hofstetter, 2022
Prof. Dr. Joerg S. Hofstetter

Associate Professor of Supply Chain & Operations Management
KEDGE Business School, Campus Bordeaux
680, cours de la Libération
FR-33405 Talence
President
International Forum on Sustainable Value Chains (ISVC)
Seegartenstrasse 61
CH-8810 Horgen
E: joerg.hofstetter@kedgebs.com

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Course: Sustainable Value Chains & Circular Economy

• Definition of value and values

• The intellectual origins of the value chain

• Value co-creation and service dominant logic (SDL)

• The experience economy

• The combination of SDL and the experience economy

• Students understand the concept of value and value chains

• Students are clear about the limitations of the current paradigm

• Students are familiar with the experience economy

• Students understand the potentials offered by the experience economy to handcrafted

Value refers to:

Value creation is considered linear, sequential and unidirectionally transitive.

• Availability-to-exchange value: The service rendered when a good or service is

• Value-in-exchange: The service rendered in the transaction of the physical item.

• Availability-to-use value: The service rendered by having access to a good or service

Goods-Dominant Logic: value is embedded and determined in production (buy to consume)

value build-up (storage of utility) value destruction

Related work evaluated in context with LOG-HSG

production sale/purchase consumption

• A multinational company traded on major stock exchange

• An unknown start-up company supplying a world renown multinational company

• An unknown start-up company supplying an unknown company

• An exporter in a developing country supplying a world renown multinational company

• A cooperative of smallholders in a developing country supplying a company in a G7

• Fell free to add further examples.

• Some values can not be measured or monetized.

Goods Dominant Logic Transitional Logic Service Dominant Logic

Service-Dominant Logic: value is co-created in networks and determined by the beneficiary

Resource application co- application Resource

= Resource integrator = Service exchange = Set of operand resources in a value network

• Axiom 1: Service is the fundamental basis of exchange.

• Service is the application of specialized competences (knowledge and skills) through

• Indirect exchange masks the fundamental basis of exchange (e.g. driven by

• All economies are service economies (as opposed to output classifications).

• Axiom 2: Value is co-created by multiple actors, always including the beneficiary.

• A service-centered view is inherently beneficiary oriented (by definition of service) and

• Axiom 3: All social and economic actors are resource integrators

• Organizations exist to integrate and transform microspecialized competences into

• The context of value creation is networks of networks (resource integrators).

• Axiom 4: Value is always uniquely and phenomenologically determined by the

• Value is idiosyncratic, experiential, contextual, and meaning laden.

• Axiom 5: Value co-creation is coordinated through actor-generated institutions and

In G7 nations a growing share of the population (particularly young generations) consider

• Considering value at different stages allows to better identify real benefits.

Prof. Dr. Joerg S. Hofstetter

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