Figure 1.3 The Dissertation Outline
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Chapter 2 Literature Review
Service industry is flourishing in the global economic system. In response to the trend of service economy, the research of service science aims to develop scientific theories to improve service systems. Service dominant logic (SDL) is one of the foundational theories in service science discipline. The insight of SDL redefines the relationships between service providers and customers, the logic of value creation and service provisioning (Vargo and Lusch, 2004). The concept of service value networks is extended from value chains in the viewpoint of SDL (Lusch et al., 2008). Studies on service value network involve the dynamic interactions among businesses and customers, value linkage in both B2B and B2C relationships and other enablers (e.g., ICT and government policy). In this research, the design of imagery-based value network is the primary focus. Therefore, in this chapter, SDL and value network related studies will be described first. To identify the value created in an imagery-based value network, the image theory is subsequently illustrated from the psychological viewpoint for both operant and operand inputs. The previous studies of cluster enterprise and their evolution logic differentiating from SDL will also be provided. In addition, the past research on SME cluster in the specific domain of tourism will be described as well. At last, a discussion of why the imagery-based value network design approach for SME clusters is required to be carried out to advance the state of the art in either value network design or cluster SME evolution.
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2.1 Service Dominant Logic and Service Value Network 2.1.1 Service Dominant Logic
Changes in consumer behavior have increased the importance of service value and competitive strategy leading to their importance surpassing that of tangible physical products, thus making the consumer market more service-oriented. Vargo and Lusch (2004) believe that the structure of the consumer market has evolved from product-based to service-based. The focus of consumer market development lies in transforming the traditional Goods-dominant logic (GDL) into the SDL, where the SDL is considered an evolutionary process of the consumer market. SDL stresses that services are a process rather than an output unit; the focus thus lies in operant resources (such as knowledge, skill and customer) rather than operand resources (such as natural resources); the value of service lies in collaboration involving the provider and consumer (value-in-use) rather than the creation and delivery process from the producer to the customer (value-in-exchange) (Vargo and Lusch, 2004, 2008).
Table 2.1 shows the differences between GDL and SDL. The value of service provided is no longer only determined by producers. Instead, producers propose their value proposition to consumers and the service value is determined after consumers’
service experiences (Vargo and Lusch, 2004; Sandstrom et al., 2008). Therefore, in order to create attractive value proposition, the interactions between firms are necessary, but are not only exchange operand resources only. Firms can share their operant resources including the needing from their customers to create innovative service (Vargo and Lusch, 2004; Vargo et. al, 2009). Consequently, an original value chain among firms would extend to a value network which enables more innovative services driven by customers (Lusch et al., 2008; Lusch et al., 2009). The value
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co-creation process in SDL then is able to foster both growth and innovation among cooperated firms (Michel et al., 2007).
Table 2.1 The Logic Shift from GDL to SDL (Lusch et al., 2008)
From : Goods Dominant Logic To : Service Dominant Logic
Operand resources Operant resources
Resource acquisition Resourcing (creating and integrating resources and removing
resistances)
Goods and services Servicing and experiencing
Price Value proposing
Promotion Dialog
Supply chain Value-creation network
Maximizing behavior Learning via exchange
“Marketing to” Collaborative marketing (“marketing With”)
Vargo and Lusch(2004, 2008) also mention that SDL has ten foundational premises (FPs). FP1 indicates that services are the basis for all transactions, and thus involve the application of operant resources, such as knowledge and skill. Tangible physical products are considered sales channels provided by services (FP3). From the perspective of the GDL, goods produced by enterprises can create value, and consumers are the users of the value of those goods. However, the SDL takes a different perspective. SDL stresses “resource integration” (FP9) and “creation of value” (FP6) where the customer is considered an operant rather than an operand resource. The SDL implies a process-oriented logic. The emphasis is on generating value-in-use rather than the traditional value-in-exchange viewpoints. Therefore, the SDL stresses that each value is unique and determined by the beneficiary (FP10).
When an enterprise is able to integrate operant and operand resources, the environment can in turn produce value. This signifies the existence of a variety of
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transactional relationships (FP8). The enterprise is unable to control value, but it can provide the orientation of value (FP7).
These foundational premises revealed the existence of value in a complex and operant service system environment, and that the subjects not only include enterprises and customers, but also environmental groups and other relevant personnel. Moreover, Vargo and Lusch also emphasized that services possess different characteristics to physical products, including intangibility, simultaneity, heterogeneity, and perishability. Services can be considered a subjective interactive process between provider and receiver, involving the transfer and use of knowledge and skills, as well as early and later stages of the operation. Traditionally, quality services involve highlighting customization and avoiding standardization. However, advances in digital technology have enabled customized service and standardization. Particularly, quality services enable breakthroughs in traditional service characteristics (e.g.
intangibility, simultaneity and perishability).
The insight of SDL contributes to the research in the development of service economy. In this research, SDL provides the theoretical foundation about how the value creates. The concept of value-in-use indicates that the service value is driven by customers after their service experience. Service providers should keep improving their services based on customer’s feedback and design excellent services for competitive advantages. In addition, the improvement of service design depends on not only the efforts from service providers but also their partners. Traditional supply chain in GDL primary emphasizes on the resource integration and management. The synergy of supply chain among business cooperation mainly contributes to the service delivery process which is only part of the entire service processes. SDL, on the other
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hand, concerns about the new resources created to benefit customers (e.g., innovative services, distinguished service experiences) based on value co-creation (including business cooperation) which can enhance the entire service processes. With the increasing complexity of business cooperation under SDL, value chain accordingly is evolved into service value network. Therefore, service value network instead of traditional supply chain becomes crucial to compose attractive value propositions for customers.
2.2.2 Service Value Network
In SDL, businesses offer service to customers rather than products. A service integrates both operand and operant resources and service value determination is from service experiences. In other words, a service provision combines both intangible value (i.e. knowledge, competence) and tangible value (i.e. financial capital, physical resources) from suppliers and is measured by customers after delivery. The increasing complexity in business to business relationships and business to customer relationships reconfigures the economic system. Therefore, the changes from products to service make firms to extend the traditional value chain focused on manufacturing to value network. A value network is defined as “a set of roles and interactions in which people engage in both tangible and intangible exchanges to achieve economic or social good” (Allee, 2008). The participants in a service value network are independent but have complementarity (Peppard and Rylander, 2006). Characteristics of a value network contain “co-produce service offering”, “exchange service offerings”
and “co-create value” (Lusch et al., 2009). In other words, a service value network comprises more than one value chain.
The roles in a service value network contain consumers, service providers, tier 1 and 2 enablers, and auxiliary enablers (Basole and Rouse, 2008). The relationships in
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a service value network are divided into B2B, B2C and C2C relationships. These relationships are influenced by social, technological, economic and political context.
Figure 2.1 shows the conceptual model of service value network.
Figure 2.1 Conceptual Model of Service Value Network (Basole and Rouse, 2008)
In the service value network conceptual model, the role of service providers is the integrator and provides service which customers expect. Customers consume service and determine service value. Service providers depend on enablers to supply resources and help service design. Tier 2 enablers provide resources to tier 1 enablers and tier 1 enablers directly supply resources to service providers. Auxiliary enablers such as government and information technology and four contexts influence the entire ecosystem. Under SDL, service providers in a value network deliver service to customers and receive benefit after service experienced by customers. Service providers and enablers in a value network convert their operant and operand resources to value proposition to customers together. Then the value proposition is converted into service value via customers. In other words, service providers, enablers and
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customers co-create service value. In a broader sense, the B2B relationships enable B2C service value and B2C relationships determine B2B service value (Basole and Rouse, 2008). As soon as customers decide the B2C service value, the B2B service value between each service provider and enabler is also determined.
The network structure highly influences the firm performance and industry evaluation (Madhavan et al., 1998; Todeva and Knoke, 2005). Value network analysis (VNA) offers a viewpoint to comprehend the roles, relationships and interactions in a value network for value creation (Allee, 2008). Peppard and Rylander (2006) proposed a five stages network value analysis to show where the value created in a value network. The five stages are described in Table 2.2.
Table 2.2 Stages for Network Value Analysis Adopted from Peppard and Rylander (2006)
Stage Description
1. Define the network Define boundaries and the focal business unit in a value network
2. Identify and define network entities Identify the role of focal businesses unit and their influence (value proposition) to customers (both direct or indirect) 3. Define the value each entity perceives
from being a network member
Identify the delivered value and value dimensions for each participant in the value network
4. Identify and map network influences Identify the value linkages between participants. The value in each linkage is concerning about the value dimensions in the previous step
5. Analyze and shape Analyze the value dimensions / role of participants / network dynamics in the network
In all NVA stages, understanding what kind of value delivered precisely to each participant in the value network is the most important (Peppard and Rylander, 2006).
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Due to value propositions which consume operant and operand resources having functional and emotional types (Sandstrom et al., 2008), the value creation after service experience has functional outcome and emotional outcome. Therefore, the value consists of intangible and tangible part and the measurement of value for different customers become dynamic and complex.
From organization theory viewpoint, a sustainable network which is an analogy to an organization must be effective to achieve the wanted results and efficiency to maintain itself (Jarillo, 1986). In other words, the existence of a network among business relies on the performance (e.g., lower transaction cost, profit) and shares outcome to network members for their satisfaction. Components in a network include links (relationships) and connection nodes (businesses). From effectiveness and efficiency viewpoint, the network design seeks for both the lowering of transaction cost and the growing of profitable among network members (Jarillo, 1986). In the analysis of network, economic researchers focus on appropriate allocation of cost to evaluate the network efficiency (Economides, 1996). The service value of the network then depends on the creation of network externalities which bring more transaction between businesses and customers (Economides, 1996; Lazzarini et al., 2001).
Network externalities occur when innovation happens to benefit the nodes or the expected numbers of customers buying increases (Lazzarini et al., 2001). Therefore, from the economics perspective, customer increasing in a network means the raise of service value to other customers (Stabell et al., 1998). The design of network from the economics perspective then seeks for the network efficiency and effectiveness by achieving allocation efficiency (Jackson and Wolinsky, 1996; Conte et al. 2010) or Nash Equilibrium under game theory (Lederer, 2001).
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On the contrary, from the social psychology standpoint, the source of value is not the same with the economic viewpoint. Service value in value network is from the connected business relationships which aim for the growth of network performance (Holm et al., 1996). In this sense, the social exchange theory and social network theory is applied for measuring service value from relationships (Holm et al, 1996;
Allee, 2000; Lazzarini et al., 2001). This approach measures value from the social exchange theory which integrates psychology, sociology and economics (Homans, 1958). Social exchange theory views social behavior as an exchange of material and non-material goods. Holm et al (1996) indicated that a set of connected businesses relationships made value creation possible in a network. For the value definition in service value network from the social psychology aspect, Allee’s work in 2008 converted all intangible value such as customer satisfaction, relationships or influence in a value network into deliverables In other words, both tangible and intangible value can be expressed as the deliverables (e.g., document as a tangible deliverable and psychological counseling as an intangible deliverable) which are the actual received value of participants in the value network (Allee, 2008). In this viewpoint, intangible value is generated from the difference between benefits which are the favors extended from others and their cost while tangible value is from the difference between revenue and cost.
Tian et al. (2008) and Caswell et al. (2008) further extended Allee’s work by integrated game theory to model the interactions and relationships in a service value network. They tried to integrate both economic and social psychological related theories to construct a service system model and calculate the service value by formulating the relationships among entities in the service system for understanding the value offering and transferring. By observing service system behaviors about
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value, customer’s satisfaction and the gaps between expected value and perceived value can be compared for increasing value and reducing cost.
Allee in 2000 argued about the creating of value from value network instead of value chain which is close to the idea in SDL. Among these research, Allee (2008) and Caswell et al. (2008) concerns intangible value, especially in Allee’s research which primary focused on how intangible and tangible value merge for value network analysis. On the other hand, Conte et al. (2010) and Tian et al. (2008), emphasized on the interactions among firms in a value network. Although the game theory served as a grounding theory for Caswell’s work and Tian’s work, Caswell only used the game theory to address the outcome of business’s choices on whether or not to cooperate with specific partners, and Tian’s work applied the game theory to model the detailed preference of businesses. Caswell et al. (2008) viewed service value as benefits including tangible value (revenue) and intangible value (value of relationships) minus opportunity cost. Tian et al. (2008) aimed for modeling a service ecosystem and assessed service value from revenue and cost.
Table 2.3 shows how a value is expressed in a value network from the economic or social psychology perspective in network related studies. Generally speaking, the value definition emerges from considering the increase of benefits and the decrease of cost to social relationships and intangible assets. In recent years, there are also some studies integrating both economic and social psychology perspective in value network design.
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Table 2.3 Studies on Value Network from the Economics or Social Psychology Perspective
Author Theory Perspective Value in a network
Economides(1996) Economics Network externalities contribute to increase the value of goods by the expected number of unit sold.
Jackson (1996) Economics Value of a network depends on how agents are interconnected. Value is the aggregation of individual utilities or production. willing to pay of customers and price of service.
Holm et al. (1996) Social psychology Value is from the commitment and smoothness of communication of network connection.
Considering the profitability (revenue – cost) associated with network relationship to access the relationship profitability.
Allee (2000, 2008) Social psychology Assess value in form of the tangible and intangible parts. Benefits are advantages or favors that can be extended from one person or group to another Intangible Value = benefit – cost
Tangible Value = revenue - cost Caswell et al. (2008) Both Economic
Social psychology
Assess value by referencing the profits from interacting with partners and expected value with buying partners.
Value = profit from interacting with partners + expected value with buying partners
(expected value of all the relationships - cost) Tian et al. (2008) Both Economic
Social psychology
Assess value through interactions among participants by using game theory. The interactions are evaluated by considering the individual preferences and information asymmetry
Value = revenue – cost
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Among these research, Allee (2008) and Caswell et al. (2008) concerns intangible value, especially in Allee’s research (2008) which primary focused about how intangible and tangible value merge. However, the implementation of Allee’s approach in intangible value assessment needed the participants answering questions in a spreadsheet which contained different measurement scales. The mixing measurement scales (such as “agree” to “disagree” and high to low level) make the final value be hard to compare with each other. The investigation of each asset from filling a spreadsheet also takes time and human resource for analysis. Additionally, both Caswell et al. (2008) and Tian et al. (2008) referenced Allee’s approach as approaches measuring intangible value. Modeling value through participant interactions also have to deal with intangible value. Caswell et al. (2008) and Tian et al. (2008) tried to calculate actual service value by using price in practice.
Nevertheless, the investigation and evaluation of price in each service, relationships and the customer’s feedback are not easy. Obviously, there should have an approach to implement the assessment of service value, relationships and customer’s feedback in an effective way from both economic and social psychological perspective.
This research works to contribute a new approach to implement the service value assessment for estimating the service value from the customers’ perspective. In this research, the service value assessment refers to both Allee’s work and the foundation concept of resource consumption in economics. While SDL indicates that service value is determined by customers, the service benefits by definition should be subjective to different customer’s perceptions. So, how to effectively describe the different cognitions from customers and then understand the service value is a key point for service value network design as discussed in this research. In the next section, the image theory is introduced for value representation.
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2.2 Image theory for Value Representation
In economic system, businesses and customers consume the output from economic activities. There are important issues to concern. For instance, how do businesses and customers make their decisions to choose products or services? What is the value of chosen products or services to businesses and customers? Image theory describes how human images affect decision makers in terms of goals and value cognition and strategy planning (Beach, 1990). In other words, when businesses or customers participate in economic activities in an economic system, there are some goals for businesses or customers to achieve. Images can be schemata to explain the decision behaviors of businesses or customers.
Image theory defines image as a cognitive structure in human’s mind which is affected by human’s knowledge (Beach, 1990). There are three kinds of images: value image, trajectory image and strategic image (Beach, 1990). Among these three images, value image represents the principles of decision makers which affect the new goal generation and action to achieve the goal. Trajectory image consists of goals to achieve. Strategic image comprises plans (sequence of behaviors), tactics (actions required by plans) and forecast (projected outcome). Figure 2.2 shows the relationships between three kinds of images. For a decision maker making up his mind to do something, in image theory, a decision maker screens possible candidates first. The compatibility test examines whether the candidates violate the decision maker’s principle or not. In single candidate scenario, compatibility test results in
Image theory defines image as a cognitive structure in human’s mind which is affected by human’s knowledge (Beach, 1990). There are three kinds of images: value image, trajectory image and strategic image (Beach, 1990). Among these three images, value image represents the principles of decision makers which affect the new goal generation and action to achieve the goal. Trajectory image consists of goals to achieve. Strategic image comprises plans (sequence of behaviors), tactics (actions required by plans) and forecast (projected outcome). Figure 2.2 shows the relationships between three kinds of images. For a decision maker making up his mind to do something, in image theory, a decision maker screens possible candidates first. The compatibility test examines whether the candidates violate the decision maker’s principle or not. In single candidate scenario, compatibility test results in