Paper presented at the La Londe conference on service management (Fosse, Wille, Andreassen & Brønn)

1. Innovating for Joint Productivity
Jan H. S. FOSSE - Deloitte Consulting, Norway
Stein E. WILL – Get, Norway
Tor W. ANDREASSEN - BI Norwegian School of Management, Norway
Carl BRØNN - BI Norwegian School of Management, Norway
ABSTRACT
Firms innovate to stay competitive but the underlying variables governing the mechanism for
short term and long term value creation are only understood to a limited extent. In this study
we specifically investigate the long-term effects of productivity improvements that either take
the firms’ or customers’ interests into account. Our point of departure is previous research by
Parasuraman (2002), Rust, Moorman and Dickson (2002), and Vargo and Lusch (2004) on
value creation for modern firms. The relationship has been operationalized through a
synergistic model that includes both the firm’s and the customer’s input-output relationship.
Based on dynamic simulations the results are surprisingly clear. When the firm considers the
customer as a partner in value creation, optimal value is gained by providing mutual
productivity improvements and long-term profitability is strongly improved. If the firm is self-
centric with its own bottom-line as focus, the firm is less profitable in a long-term perspective.
Thus, this research confirms and expands the service dominant logic in a managerial
perspective.
Jan H. S. Fosse (MSc) is a consultant with the strategy and operations practice at
Deloitte Consulting, 0475 Oslo. Norway.
Phone 0047 95 43 96 82
Email: janhenryfosse@gmail.com
Stein E. Wille (MSc) is an account manager with the large client department at
Get. 0663 Oslo. Norway
Phone 0047 93 42 32 70
Email: sewille@gmail.com
*Tor W. Andreassen (PhD) (Corresponding author) Professor and Chair Department of
Marketing at
BI Norwegian School of Management - Room # C4-073 - PoBox 20 - Nydalsveien 37 –
N-0442 Oslo - Norway
Phone: 0047 46 41 05 25
Email: tor.w.andreassen@bi.no
Carl Brønn (PhD) is an Associate Professor, Department of Strategy and Logistics at
BI Norwegian School of Management, Room # B3-060. PoBox 20. Nydalsveien 37.
N-0442 Oslo. Norway.
Phone: 0047 46 41 04 70
Email: carl.bronn@bi.no

3. Innovating for Joint Productivity
INTRODUCTION
Societies and industries thrive to profitability, reducing costs and im-
when companies jockey for better posi- proving quality. For risk averse managers
tions (Porter 1985) through a process of cost cutting has been the preferred route.
creative destruction (Schumpeter 1934). Even though they may believe in the
At the heart of most changes lies alternative, the associated risk and time
innovative use of technology, i.e. techno- pressure often make them shy away.
logy to improve the firm’s competitive However, there is a strong support in the
advantage through costs reductions or marketing literature linking customer-per-
increased revenue through differentiation. ceived quality and customer satisfaction to
Balancing measures to improve efficiency positive business outcomes, supporting
and effectiveness is at the heart of any the effectiveness of a customer focus (e.g.
business manager’s decision making. In improving quality) Rust et al 2002: 9). This
order to reap the long-term benefits notion is also strongly supported within the
managers need to make sure that the firm market orientation and strategy literature
survives in the short term. In other words: (Rust et al. 2002).
today’s decisions may impact the long-
term conditions to survive. For service In a recent article, Parasuraman
firms one typical trade-off is cost cutting (2002) suggested that higher levels of
today and its potential impact on customer service quality can be obtained not only
satisfaction tomorrow. While some cost through more consistent quality over time
reductions may leave customer satis- but also by reducing customer inputs
faction unaffected or improved (e.g. re- (time, effort, emotional energy) and in-
duced breakage) other cost cutting efforts creasing company input (labor,
may have a direct impact on customer technology, equipment etc.). Because
dissatisfaction (e.g. customer service) in most services are co-produced service
the following periods. At the heart of this quality will “influence outputs from both a
discussion lies organizational efficiency company and customer perspective.”
and effectiveness. Parasuraman (2002) defines customer
output as service performance and
There are a number of definitions satisfaction, and company output as sales,
of organizational efficiency and effective- profits and market share. Finally, and in
ness. We define effectiveness as “the keeping with the disconfirmation of
degree to which an organization realizes expectation paradigm (Oliver 1980),
its goals” (Etzioni 1964). The efficiency of customer satisfaction should increase
an organization is measured by “the (alternatively customer dissatisfaction de-
amount of resources used to produce one crease) with increased perceived service
unit of output” (Etzioni 1964, p 6). The quality. Today there are few, if any,
argument is that there is a distinction here: research studies that focus on the impact
on the one hand, productivity (efficiency) is of productivity and performance when
the ‘amount of resources used to produce customers are part of the value creation
a unit of output’ and on the other hand, process. The purpose of this study is to fill
effectiveness is the ‘degree to which an this gap in the literature. The research
organization realizes its goals’. (Etzioni question that guides our study can be
1964, p 8). Fundamental to this thinking is expressed as: What is the long-term
the well-developed and documented ser- impact of firm or customer focused
vice quality -> customer satisfaction -> productivity innovations? We will address
performance link, (see for example Fornell this question in two steps. First, from the
1992; Rust et al. 2002; Rust and Zahorik literature we will identify key relationships
1993; Rust et al. 1994). From this linkage behind firm and customer productivity’s
managers know that there are two routes impact on firm performance. Second, from

4. this review we will build a dynamic the above studies is the firm level. While
simulation model to test the relationships. Rust et al. (2002) is a cross sectional
From the base model we will simulate the study based on self-reported and longi-
effects over time of two types of invest- tudinal secondary data, Parasurman
tments in self-service technology: one that (2002) and Vargo and Lusch (2004) are
maximizes firm productivity and one that normative and conceptual frameworks.
maximizes customer productivity. The test Our contribution is a dynamic model con-
lies in impact on performance over time. trasting the service and goods dominate
logic of value creation (Vargo and Lusch
CONCEPTUAL MODEL 2004), and testing them with regard to
effectiveness.
As alluded to above, there are
three ways to an improved bottom line: Customers’ use of technology to
increase revenue, reduce costs, or a produce and receive the service is often
combination of these. According to Rust, referred to as self-service technology
Moorman and Dickson (2002) firms that (SST), i.e. Technological interfaces that
primarily focus the revenue side will have enable customers to take advantage of a
a higher return on investment than any of service without any involvement from
the other two options. While the hybrid service employees (Meuter et al. 2000).
solution (cost cutting and revenue expan- SST has been successfully implemented
sion at the same time) was documented in in private sector service firms (Blumberg
one study (Mittal et al. 2005) to have the 1994). Given the elasticity of substitution
highest return, the authors concluded that the firm can increase its capacity and
difficulties of maintaining a balanced focus productivity by replacing labor with
on both revenues and costs caused technology, and the consumer gains the
problems for management. The emphasis freedom of easy and unconstrained
on applying technological solutions to the access to desired services. For the firm,
challenge of financial performance is a and especially one in a very competitive
natural cones-quence of advances in infor- market with small margins, the case for
mation technologies. With the proliferation SST can be very compelling in the quest
of Internet-based firms and the increasing for a competitive advantage. In the
acceptance of consumers for doing extreme, advances in technology allow the
business online, it is natural for other types firm to essentially “outsource” most client
of service providers to explore the use of relations’ activities to the clients them-
technology in the production and delivery selves.
of services. Following the findings of Rust
et al. (2002), Rust and Kannan (2003) For the customers, there are addi-
argued that the “electronification” of tional consequences that over a period of
services (e-service) had the highest poten- time will begin to affect the relationship
tial if it was employed to increase the between the service provider and service
service level to the customers (i.e. the firm user. This dynamic interplay of action ->
can offer more with less) rather than to reaction between firm and customer is
reduce costs (e.g. increased productivity illustrated conceptually by Parasuraman
through self service). One thing missing in (2002).

5. Figure 1: The Duality of service productivity
In terms of systems thinking again manifests itself through various
(Senge 1990), the challenge faced by symptoms. Over time these symptoms are
service providers can be described by the then addressed with more of the same
“Shifting the Burden” archetype, as medicine – short-term solutions. But the
illustrated in Figure 1. The behavior of this beneficial results become more difficult to
system is as follows. A triggering realize as the fundamental problem
condition, the Problem Symptom, for becomes more and more entrenched.
example, weak financial performance over
time, initiates activities on the part of the Service firms that decide to
firm to alleviate it. These actions can be of emphasize the SST approach to customer
two types. The first is a short-term interactions can be susceptible to
“Symptomatic Solution” that yields relative- behaviors described by the Shifting the
ly immediate results. The other action is Burden archetype. The side effects is, of
associated with addressing the “Funda- course, increased customer workload. This
mental Solution,” which lies deeper in the increase, if kept within “reasonable” levels
system and which takes relatively longer to through, for example, user-friendly
assert its beneficial effects. Both solution interfaces, comprehensive help and on-
types feed into and alleviate the Problem line functions, and accessible customer
Symptom but at different rates and support services, contributes to increasing
strengths. The natural human tendency is customer productivity and satisfaction.
to rely on a strategy of implementing the However, if these amenities are not readily
quicker symptomatic solution, but this has available then more of the customer’s time
additional side effects that are unintended and effort will be spent on non-productive
and usually not appreciated. The activities associated with trying to perform
conundrum is that the consequence of a function. Over time, this will result in
relying on a symptomatic solution actually consequences for the service provider.
worsens the fundamental problem, which

6. Symptomatic Solution
(developing SST)
+
- +
Problem Symptom Side Effect
(weak financial (customer
performance) workload)
-
Fundamental Solution +
(maintain loyal -
customer base)
Figure 2: The Shifting the Burden archetype
As with any new technology, there Side Effects (customer workload) with
is an adoption and a learning curve that Fundamental Solution (maintain loyal
consumers must overcome in order to customer base). The polarity of the link is
realize the full value of the technology negative. This means that as the level of
(Vargo and Lusch 2004). Any frustrations the causal variable Side Effect increases,
experienced in this phase will reduce the then the ability to realize the Fundamental
productivity of the customer as they will Solution will decrease; there is an inverse
experience a decrease in service con- relationship between these factors. This
venience, i.e. “.... Consumers’ time and relationship is important in that it is a
effort perceptions related to buying or fundamental requirement that the firm has
using a service” (Berry et al. 2002). a loyal customer base. This has several
Negative consequences are mitigated to important consequences for growth, not
some extent if the company maintains an the least of which is the word-of-mouth
effective service staff that can assist effect.
customers. Over time, however, other
effects will accumulate and can have a In the following paragraphs we
delayed impact on the relationship bet- detail the logic that links the side effects of
ween the company and its customers. In the press for greater customer involvement
the causal loop diagram of Figure 2, these in the co-production process (Lusch et al.
effects are represented in the arrow linking 2006) with its consequences.

7. Service Labor
Investment
+
-
SST
Firm co-production Investment +
Customer co-production
workload workload
+
+
+
+ +
Cost level Customer Technology
SST Service Proficiency - Time pressure
- -
Performance Level
Price level Financial Firm productivity Customer productivity +
Performance level +
+ + - Switching Cost
+ + Treshold -
Revenue level Increase Decrease
+
Likelihood of
Size of defection
customer base
+ -
Customers gained Customers lost
+
Figure 3: Dynamic model
The process is complex in that the higher degree of SST are that its operating
relationship between customer productivity costs will be reduced by converting
and workload is non-linear. Although customers to part-time employees. The
people deal with stress due to workload in actual amount of work that the firm
individual ways, the general relationship contributes to the co-production process
can be described as an inverted u-shape decreases as the burden for executing
with the vertical axis representing pro- interactions is shifted more to the
ductivity and the horizontal axis the customers. This, coupled with increased
workload. People will respond positively, production capacity, will increase firm
but at a decreasing rate, to increased productivity. In sum, replacing expensive
work, but as the workload a passes labor with less expensive technology
through a critical level, productivity will serves to improve the firm’s financial
drop off. Reduced convenience (Berry et situation.
al. 2002) may create an incentive to
change patronage (Keaveney 1995). Not Employing technology in services
surprisingly the loyalty bond between the implies often a de-emphasis on labor and
customer and the supplier is weakened. the interpersonal service aspects of value
The decision to change from one supplier production. This can be an additional side
to another is further mitigated by the cost effect of implementing new technology.
of changing suppliers (Shapiro and Varian Over time, this side effect can negatively
1999). However, if the impact of shifted influence the ability of the firm to maintain
workload from SST is sufficiently great, the a loyal customer base (Selnes and
threshold switching cost will be exceeded Hansen 2001). Reduced customer loyalty
and the relationship is broken. may increase customer voice and exit
behavior (Hirschman 1970) thus impacting
The firm also experiences cones- the size of the actual customer base. In
quences from investments in SST. The turn this will affect the firm’s financial
benefits to the firm from implementing a performance both directly and indirectly.

8. These relationships are very customer base. Results are aggregated
complex and the behavior resulting from over the time steps. A central feature of
their interactions can only be understood the model is related to the concept-
through simulation. Co-production and the tualization of the SST performance level
customer’s productivity is a complex and its influence on customer productivity.
relationship, but the effect of shifting more This variable is a function of the total SST
responsibility for value creation on to investment and the customer’s ability to
customers can increase the likelihood of use the technology based on their
defection. The size of the customer base proficiency level, thus establishing an
and the ability of the firm to maintain a endogenously defined performance metric.
loyal base, and derive the benefits of This is in keeping with the thinking behind
positive word-of-mouth, are crucial to the Technology Readiness Index
being able to maintain financial perfor- (Parasuraman 2000).The simulation runs
mance at acceptable levels. That the over a time period of 48 steps with four
precedents of the ability to maintain a loyal exogenously defined variables including
customer base are associated with Service Labor Investment, SST Invest-
potentially significant time delays makes ment, Price level, and Customer Tech-
understanding and interpreting these nology Proficiency. The investment levels
relationships even more difficult. The next are used to establish the two opposite
section develops a system dynamics- scenarios.
based simulation model that enables us to
understand the potentially conflicting In the first scenario the firm
outcomes from the business process reduces their investment in service labor
strategy. aggressively and maintains a low level of
spending. This implies that a firm would
ANALYSIS AND RESULTS reduce or remove personnel that used to
A simulation model that captures produce and deliver the service and rather
the short-term and long-term relationships let customers carry the workload using the
in the value co-production process was technology interface. In order to establish
developed. The model enabled simulation a functional SST platform the firm would
of two scenarios that represent extreme allocate an initial investment, but reduce
opposites with respect to investing in SST. spending as quickly as possible. Sub-
While the first case focuses on improving sequent investment for improvements and
the firm’s productivity, the second case further development would be kept at a
emphasizes customer productivity. This minimum. In short, the firm improves its
contrasting of interests captures the productivity and reduces customer pro-
different views in goods and service ductivity.
dominant logic of value creation. All
simulations are executed using the The results indicate an initial
Vensim simulation package. The model is improvement measured in both financial
based upon the dynamic model in Figure 3 performance and productivity due to the
with the addition of the stock size of reduced firm workload.

9. Financial Performance level
400,000
300,000
Monetary value
200,000
100,000
0
0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48
Time (Month)
Figure 4: Financial performance in scenario I
However the results shift drama- In the second scenario the firm
tically towards the second half of the reduces service labor to a lesser extent. In
simulation period. Customers start leaving addition, the firm keeps investing in SST to
the firm when their workload gets dis- further develop and improve the service
proportionably large and the financial offering once the initial investment is
performance drops when revenue losses made. This is done to reduce customer
outweigh the benefits of cost reduction. workload. In short, the firm reduces its
Additionally, the switching cost threshold is productivity but increases customer pro-
reduced when customers experience time ductivity. The simulation results indicate
pressure as a result of the increased that both the firm and the customer
workload. The lowered switching cost benefits from a better balanced distribution
threshold increases the probability of of workload.
customers ending their relationship with
the firm.
Financial Performance level
600,000
450,000
Monetary value
300,000
150,000
0
0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48
Time (Month)
Figure 5: Financial performance in scenario II

10. Financial performance improves think “customers first” and accept a
throughout the simulation and there are temporary drop in firm productivity
also strong improvements in firm pro- awaiting customers future response to
ductivity. Customers initially experience innovative solutions that better integrate
some loss of productivity when shifting customers’ recourses with the firm’s
from service to self-service. This result is resources.
partly based on an initial limited ability to
utilize the technology since the customer For managers struggling with which
must both learn to use the SST and school of thought to follow – service
perform the service. dominant or goods dominant – will know
from this study that the financial per-
MANAGERIAL IMPLICATIONS formance seems to be more rewarding for
firms innovating in accordance with the
Balancing operational issues and service dominant logic of co-creation of
market issues has always been a value. This finding is rather unique as the
challenge to managers, more so for service dominant logic has never been
service firms than traditional manu- tested with regard to effectiveness.
facturing firms. In this study we have
investigated the long-term effects on LIMITATIONS
performance of two types of innovations,
increased use of SST to improve firm We have developed a general
productivity or customer productivity. From model capturing value creation for service
the results of the simulations we see that firms. From this we made two simulations
although effects of innovations that follows focusing either firm or customer interests.
the goods dominant logic (i.e. maximize Value creation is complex and we have
firm productivity) are very promising in the only captured some key relationships and
short run the long term-effects are made some assumptions about their
discouraging. Obviously customer reac- intercorrelations. Future research should
tions from being forced to do more of the elaborate on our model by including other
job themselves leads to customer variables and investigate more thoroughly
dissatisfaction and finally customer exit. how they relate to each other. Future
The feeling of imbalance in the workload is research should test the model for
in keeping with Homans’ law on equity different types of services (e.g. tailor made
(Homans 1961). Many firms would prob- versus standardized) or capturing different
ably remedy the increased workload with a customer segments (e.g. age or different
reduced price, reflecting their own cost scores.
savings and partially passing them on to
the customers. Adjusting for price
reduction in the simulation we see the
same pattern with regard to performance.
Innovations for productivity in
accordance with the service dominant
logic (i.e. maximize for customer
productivity) are discouraging in the short
term but rewarding in the longer run as
they produce results that far outperform
the initial losses. From this we can learn
that despite a reduction in firm productivity
the long-term effects of increased
customer productivity far exceed the firm’s
initial loss. Contrary to traditional pro-
ductivity thinking service managers should

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