CEPA eprint 4131

Cybernetics of value cocreation for product development

Espejo R. & Dominici G. (2017) Cybernetics of value cocreation for product development. Systems Research and Behavioral Science 34(1): 24–40. Available at http://cepa.info/4131
Table of Contents
Introduction: The Value Cocreation Shift and the Contribution of Cybernetics
Second-order Cybernetics and Value Cocreation
Balancing Varieties in the Value Cocreation Process
Design of Variety Operators: The Viable Systems Model for Managing Value Cocreation
Guidelines for Value Cocreation
Conclusions and Further Research
Appendix
References
In marketing theory, the shift from the paradigm of value creation to value ‘cocreation’ calls for a deeper grasp of the interactions between producers and customers. Marketing studies have widely focused on the value cocreation concept, but so far, the mechanism through which consumers can be involved in the process of value cocreation through product development had found little space in marketing studies. In this theoretical paper, we aim to fill this gap and pave the way towards a better understanding of the mechanisms of value cocreation for product development through second-order cybernetics. We conceive the market arena as a physical or virtual place where communications of value propositions produce eigenforms driving the eigenbehaviours of producers and customers towards shared meaningful objects. Based on these assumptions, we offer a framework based on the viable systems model and the law of requisite variety to shed light on processes of interaction between producers and consumers in the market arena. The proposed framework can be an effective tool for the managers involved in product design and marketing to contribute to a firm’s policies by supplying a clearer picture of the systemic relations involved in the value cocreation for product innovation and product development.
Introduction: The Value Cocreation Shift and the Contribution of Cybernetics
Since the beginning of the new millennium, the paradigm shift from value creation to value ‘cocreation’ has gradually developed as a marketing concept in parallel with the development and diffusion of digital technologies and a deeper grasp of organizational learning in marketing theory. As anticipated by Toffler (1980) more than three decades ago, the increasingly empowered relational capabilities of individual consumers, made possible by the advancements of information and communication technologies, have generated a shift in the concept of value creation. Indeed, the old logic of marketing based on the production and supply of goods to a targeted consumer has become obsolete and is ineffective in depicting and understanding effective processes of value creation (Zuboff and Maxmin, 2002; Dominici, 2009). The field of ‘service-dominant logic’ (Vargo and Lusch, 2008 and 2004; Lusch and Vargo, 2014) emerged, and value cocreation began to assume a key relevance in the marketing literature (Grönroos, 2006, 2008; Woodruff and Flint, 2006; Kalaignanam & Varadarajan, 2006), highlighting the processes by which both producers and consumers (i.e. following Toffler, the prosumers) interact and participate in the process of the creation of value (Bendapudi and Leone, 2003; Etgar, 2008). The aforementioned shift means that the consumer is increasingly an active participant and not just a mere target that passively receives stimuli in terms of the producer’s value proposition (i.e. offerings and communications). Together, consumers and producers can create an active system of shared meanings through recurrent communications. Consumer empowerment is challenging the old deterministic and reductionist marketing models (Dominici, 2012; Dominici et al., 2013). The perspective on value creation has shifted from the firm creating a value proposition and selling it, to a ‘customer value proposition’ being cocreated (Saarijarvi, 2012). This implies that companies that are keen on cocreating look for new ways to appoint customers with ‘consulting’ roles in their processes of creating a value proposition. Customers are thus no longer regarded as inert targets of the value proposition but are rather coproducers of the value they buy.
The ‘cocreated’ value depends on how prosumers together create the market offerings (Pongsakornrungsilp and Schroeder, 2011) as symbolic meanings of the cocreated experience of consumption (Fırat and Dholakia, 2006; Firat et al. 1995). Value is, indeed, a complex ‘adimensional’ experience that assumes different connotations depending on the time and context (Holbrook, 2006). The cocreation of value can embrace the design (e.g. codesign), production and communication (e.g. coadvertising and copromotion) aspects of the marketing proposition of the company and is influenced by the experience of the consumer (coexperience). Hence, the shift is from the material structure of the value proposition to the system of value cocreation resulting from the interactions among multiple actors and resources supported by symbols as ways to coordinate interactions through information (Akaka et al., 2014).
This Kunian shift goes to the core of the market economy. The most relevant shift is that from an uncontroversial ‘thing’ to that of reality-grounded meanings produced by recurrent communication ‘processes’. More than simply ‘what’ is produced and its physical attributes supplying a ‘value in use’, the focus is now on ‘how’ cocreated meanings are shared in dynamic communication processes.
In marketing literature, we find a significant focus on the cocreation process where the notion of adding value is considered to stem from the brand (Nandan, 2005; Payne et al., 2009; Hatch and Schultz, 2010; Rindell and Strandvik, 2010; Ingesias and Bonet, 2012; Gyrd-Jones and Kornum, 2013; Vallaster and Wallpach, 2013) rather than from product development. In this work, even though we recognize the great relevance of branding for the value cocreation, we will focus on the product development process applying our model to shed the light on the mechanism of interaction among consumers and firms for the design and market of a new product or the improvement of an existing one.
It is neither the product that creates the symbolic image of itself nor the market image that creates the product; it is rather the potentials of the product, with all its inherent constraints, that are catapulted by the interactions and communications of producers and consumers. Innovation and creativity are grounded in a symbolic embodied production reality. The product is thus the crystallization of value in the cocreation processes, or in cybernetic terms, in an eigenform, as is discussed in the next section (von Foerster, 1981a, 1981b, 1981c, 1981d; Kauffman, 2005, 2007).
Value cocreation involves product innovation that establishes or increases the consumer’s valuation of the benefits of consumption in terms of use value, psychological value and social value. Therefore, the value given by the product is created not only by the brand value but also by the conjunction of both brand and design values and, more specifically, by the mix of values consumers give to the product. In this paper, we will highlight how ‘value by design’, for a new or renewed product, crystallizes in the eigenform of the brand.
The words ‘cocreation’, ‘coproduction’ and ‘prosumership’ refer to circumstances in which consumers (alone or in groups) work together with firms to create products that are of value to them (Humphreys and Grayson, 2008). Even though consumers do not produce in the conventional sense, consumers do contribute to the creation of value through intangible aspects such as immaterial work and social relationships (e.g. giving hints to producers, creating new uses for the same product and advertising it through word of mouth) (Cova and Dalli, 2009).
Understanding the interaction mechanisms between consumers and firms through which the value of new products is created by design can fill the existing gap in the literature and managerial practice. Cybernetics can provide useful insight to this aim, and the viable systems model (VSM) can be used to manage and implement a value cocreation process for the design of new products or the redesign of existing ones.
Part of the current marketing and management discussions on value cocreation in the service, new product development and innovation literature focus on the reconfiguration of the production function shifting the focus from the firm’s internal production of value to the increasing dependence upon the active participation of consumers (Lagace, 2004; Cova et al., 2011).
Despite its relevance, few studies have to date attempted to create a framework useful in managing the processes of value cocreation for product development, innovation and creation of new products. Among these studies, Hoyer et al. (2010) created a comprehensive framework and a research agenda, while Saarijarvi (2012) considered the strategic implication of value cocreation mechanisms. Both of these works give relevant insights but do not deal with constructing a holistic model for the management of value cocreation in product development. Following this stream of research, this paper aims to fill the aforementioned gap in the literature by adopting a cybernetic view of the interactions underpinning value cocreation for evolving products in the market, and particularly for product development (including the development of new and existing products), and to supply a framework to implement its operations and strategies. In this theoretical paper, we will show how cybernetics can be effectively used to fill this gap and give a positive answer to both of the following research questions:
Can cybernetics help us to better understand the processes of value cocreation in general, and for the development of products in particular?Can the VSM contribute a sound approach to shaping a more effective value cocreation process, able to achieve higher satisfaction and value?
To this end, after exploring the issue of cocreation, we discuss a comprehensive complexity management approach grounded in the VSM (Beer, 1979, 1985) that aims to
offer a theoretical framework for value cocreation grounded in second-order cybernetics.depict value cocreation as a dynamic process of cybernetic loops of interaction. In this perspective, the product is considered an ‘accumulated output’ produced by recurrent interactions (Miles, 2007, Wene, 2015) or an eigenform (von Foerster, 1981a, 1981b, 1981c, 1981d) deriving from an ongoing dynamic seeking satisfactory complexity management in the cocreation process.shed light on how consumers and producers can engage in increasingly effective cocreation processes.supply, through a method of variety balances (Espejo, 2015a), a framework to manage and improve the quality of cocreation processes and to explore effective ways of fostering collaborative strategies for existing and new product development. This implies modelling cocreation relationships as homeostatic loops underpinned by variety operators.
These aims are clarified and illustrated in the next sections of the paper. The proposed model, framework and method are offered as tools to support product design and marketing managers in value cocreation policies. The proposed application of the VSM helps to have a clearer picture of systemic interactions and allows a better and more effective management and implementation of the cocreation of value for product innovation and development.
Second-order Cybernetics and Value Cocreation
This paradigm shift in marketing was predated by at least two decades by cybernetics. The epistemology of the so-called first-order cybernetics of the 1940s (Wiener, 1948) changed direction in the 1960s towards what we call today ‘second-order’ cybernetics, or cybernetics of cybernetics (von Foerster, 1974 and von Foerster, 1981a, 1981b, 1981c, 1981d; Maturana, 2002). Von Foerster (1974) distinguished between the cybernetics of observed systems and the cybernetics of observing systems (second-order cybernetics). First-order cybernetics gave preeminence to observers observing black boxes out there as ‘real’ things whose existence was independent of the observer. Second-order cybernetics put the observer inside the black box as a reflexive observer who contributes to producing, as well as being changed, by the black box’s outcomes. The objects of observation are no more conceived as ‘things out there’, but rather as self-constructed, self-referential systems, so that ‘we name them and by doing this we are bringing them into existence’ (Espejo and Reyes, 2011: 4). This represented a shift from the ‘modern’ perspective of the detached observer to the recognition of the participation of the observer among the constituents that construct reality (Krippendorff, 1996). As the anthropologist and social scientist Bateson (1979), 1972 pointed out, individuals always take part in the circularity of the world, through a reflexive turn that interactively constructs a ‘reality’ (Krippendorff, 2008). This new epistemological emphasis of cybernetics is one that ‘favors the construction of realities that preserve the circularities of participation in networks of conversation’ (Krippendorff, 2008: 182).
In this framework, we can see value cocreation as a process through which the human constituents of the value system coordinate themselves in the creation of symbols and artefacts that become part of, and at the same time modify, the relational systems that create them.
In this epistemology, a ‘product’ is the crystallization of value in a cocreation process between a producer and a consumer, which can be conceived as what von Foerster (1981a, 1981b, 1981c, 1981d) called an ‘eigenform’. The ‘product’ is thus an embodied token underpinned by processes of value creation, which cocreate, through recurrent producer–consumer relations, a stable form. In other words, for processes of coconstruction, it is more true to say that ‘the map is the territory’, rather than the famous expression of Alfred Korzybski that ‘the map is not the territory’. More accurately, as pointed out by Gregory Bateson (1972: 460):
We say the map is different from the territory. But what is the territory? Operationally, somebody went out with a retina or a measuring stick and made representations which were then put on paper. What is on the paper map is a representation of what was in the retinal representation of the man who made the map; and as you push the question back, what you find is an infinite regress, an infinite series of maps. The territory never gets in at all. […] Always, the process of representation will filter it out so that the mental world is only maps of maps, ad infinitum.
In value cocreation, producers and consumers are structurally coupled, or in Maturana’s and Varela’s terms:
We speak of structural coupling whenever there is a history of recurrent interactions leading to the structural congruence between two (or more) systems. (Maturana & Varela 1992: 75).
By a ‘structural coupling’, in cybernetics terms, they mean structural adjustments in a history of recurrent interactions. Recurrent two-way interactions between producers and consumers are feasible at increased resolution and proximity in the digital economy. Whenever this is the case, the outcomes of these recurrent interactions can be shared meanings for products; together, prosumers can cocreate innovative and symbolic meanings. From the perspective of the producer – which as an autonomous system is operationally closed (i.e. able to develop a capacity to create, regulate and produce social meanings) – its inputs and outputs produce two principal feedback loops; one is the external feedback or market disturbances, and the other is (as an active observer of its own states) the producer’s internal computing of its own states. As von Foerster says about this double-loop learning:
Cybernetics considers systems with some kind of closure, systems that act on themselves – something which, from a logical point of view, always leads to paradoxes since you encounter the phenomena of self-reference (Foerster 1995: 9).
Recurrent feedback triggers operational adjustments or structural coupling of the producer with its market. Behavioural outcomes are the congruences between them. Producers and consumers, as an outcome of these recurrent interactions, reach stable positions or eigenforms. This is a process of value cocreation underpinned by the double-loop learning of the producers and consumers. Sustained recurrence may trigger new eigenforms. In highly effective communication set-ups, a product is an eigenform, which means an embodied symbolic entity that participates in a network of interactions, taking on its solidness from the producer’s structural capabilities and constraints. Products as embodied eigenforms are the outcome of congruent eigenbehaviours between the consumer and the producer in the process of cocreating a reflexive objectivity of themselves (Soros, 2009). It is this stability of the process that constructs the symbolic value of the product. The product is thus not a separate object; objects are recursively constructed objects in language. The perceiver and the perceived arise together in the discourse of value creation.
Although value cocreation is a manifestation of productive relationships and eigenbehaviours, its scope is constrained by production and communication capabilities. In cybernetics terms, we talk about negative explanations driven by requisite variety. Situational ‘variety’ – the number of possible states of a situation – can reach very large numbers (Ashby, 1964), and requisite variety tells us that the number of the producer’s possible outcomes is larger than (or at least equal to) the ratio between the numbers of possible environmental disturbances and the possible producer’s responses (Espejo and Howard, 1982). If the number of acceptable states to remain competitive in a market is smaller than the variety of the producer’s possible outcomes, then we know that satisfactory performance is unachievable and that value cocreation will not succeed: we do not know what will be case, but we know that value cocreation is not possible. Hence, the relevance of giving requisite variety to organizational systems, that is, giving these systems viable structures with the capability of responding to unexpected disturbances. Cybernetics differs from other fields of knowledge because it does not operate and propose explanations through causal relations, but by specifying constraints (Bateson, 1972). From an epistemological perspective, cybernetic explanations are negative:
Causal explanation is usually positive. We say that billiard ball B moved in such and such direction because billiard ball A hit it at such and such angle. In contrast to this, cybernetic explanation is always negative. We consider what alternative possibilities could conceivably have occurred and then ask why many of the alternatives were not followed, so that the particular event was one of those few which could, in fact, occur ( Bateson, 1972: 375).
The argument about the producer’s requisite variety and the prosumer’s value cocreation from the perspective of their interactions is the concern of the next section.
Balancing Varieties in the Value Cocreation Process
Complexity asymmetries are expected in all kinds of interactions. In a large market with many potential customers, demand can overwhelm producers. On the other hand, if the interaction is between one customer and one producer and concerns technical matters, the likelihood is that the producer’s complexity will be larger than the consumer’s. Following Ashby’s proposition of variety as a measurement of complexity (1964),[Note 1] the producers’ possible offerings and the consumers’ expectations define their relational complexity for the purpose of developing a market relationship. For as long as prosumers’ interactions are maintained, we can assume that self-organization will be responsible for the amplifiers increasing the complexity of the low-variety side and attenuators reducing the complexity of the high-variety side in the interaction; these are the variety operators balancing their complexity asymmetries (Espejo, 2015a).[Note 2] Variety operators emerge from these balancing processes by self-organization to comply with the law of requisite variety (LRV). For instance, either by happenstance or by design, the relatively high complexity of customers in the market will be ‘attenuated’ to match the producer’s lower response complexity, and the producer’s smaller complexity will be ‘amplified’ to match the customers’ complexity at an accepted level of performance.[Note 3] How far prosumers are prepared to maintain their interactions relates to the performance criteria that they are prepared to accept: if the producer losses money consistently, or if the customers change their interests or are consistently dissatisfied with product quality, chances are that the interactions will be disrupted. However, for as long as these are maintained, ‘variety operators’ – that is, attenuators and amplifiers of complexity – will exist between them. We discuss and illustrate these self-organizing processes in some depth later in the paper and in its. We will argue that, for value cocreation, the prosumers’ interactions need to be maintained and need to evolve through learning processes, that is, through increasingly effective performative action. Complexity imbalances are countered by the prosumers’ willingness to maintain their interactions over time; it is natural to expect that a lack of interactions or weak interactions will halt cocreation.
Barry Schwartz (2005) divides costumers into two main categories: maximizers, who are individuals determined to make only the best choices, and satisficers, individuals seeking a given standard and who are satisfied when they find a product that satisfies that standard, whether or not it is the best existing option. The excess of variety in the offer stalls the purchase behaviour of maximizers and tends to challenge the standards of satisficers. Indeed, inward-looking maximizers become increasingly paralyzed by a decision space beyond their evaluation capacity (Boisot and McKelvey, 2010). From a cybernetics perspective, when the variety of the stimuli is high and the variety of responses is relatively low, the question arises of whether customers are operating under ineffective forms of structural, conversational or cognitive constraints (Espejo and Watt, 1988).
In business to consumer markets, the distance between consumers and producers is managed by intermediaries that can act both as variety amplifiers for the producers and variety attenuators for the consumers. Whether intermediaries support the producers’ performance depends on the nature of the relationship; for instance, if producers need quick feedback from consumers and intermediaries are culturally slow, performance will suffer.
Ashby’s LRV variety is a constraint on any relationship. To manage interactions better, it is possible to work out effective variety operators that improve upon those that emerge out of self-organization. Variety balances lie at the core of cocreation processes; in a situation with complexity asymmetry, where the interacting parts accept maintaining their interactions, self-organization constitutes variety operators, but these may not be adequate. Improving this situation may require guiding self-organization and designing variety operators; this is a form of variety engineering (Beer, 1979, 1981). Proposals for engineering are discussed in the next section.
To model interactions, we consider two flows of value propositions: the producer value proposition, going outward from the firm to the market and the consumer value proposition going from consumers towards the firm (Figure 1). Aspects such as the consumer’s involvement in the value cocreation process (Hoyer et al., 2010; Saarijarvi, 2012) are important for the design of variety operators. For instance, successful product innovation and new product development depend on a deep comprehension of customer needs (Hauser, et al., 2006; Hoyer et al., 2010) that may not be sufficiently understood through statistical marketing research methods alone (von Hippel, 2005; O’Hern and Rindfleisch, 2009; Hoyer et al., 2010).
Figure 1: Complexity asymmetry and variety balance in value cocreation
To support customers engaging in value-cocreating activities, companies must create variety management mechanisms that engage customers, allowing them to assume a role in the company’s marketing and product innovation processes. For a customer, getting involved in the design of a product or in an advertising campaign may be too complex; if the producer desires such involvement, mechanisms of variety attenuation need to be designed to allow customer involvement. Today, digital technology is making it possible for customers to access unlimited amounts of information. The great range of purchasing options creates frustration for those customers who have less ability in variety attenuation.
Design of Variety Operators: The Viable Systems Model for Managing Value Cocreation
The VSM ( Beer, 1966, 1979, 1981; Espejo and Reyes, 2011) offers an important heuristic for the design of variety operators. Today’s understanding of the VSM is that of an advanced model underpinned by both Ashby’s LRV and the epistemology of second-order cybernetics. Its understanding of communications, organization and interorganizational processes gives us new insights into value cocreation. The VSM, supported by a methodology (e.g. Espejo, 2015b), can shed light on the relational dynamics of value cocreation by supplying a deep and cohesive framework that highlights the relevant relations among cocreation agents, allowing us to consider their systemic context. The application of the VSM – and in particular of the relationships between producers and consumers (i.e. the prosumer relationships) and also within the organizational system (i.e. cohesion and policy relationships) – helps shed light on how to engage prosumers in processes of meaning cocreation.
For marketing, the cocreation system relies, among other aspects, on supply offers and consumer choices. From a cybernetics perspective, the more these relationships are dominated by poor variety balances imposing the values of one or the other, the more likely it is that the loop between them will create unsatisfactory markets and will give way to weak choices that reduce the chances of desirable, ethical and innovative products or services that increase the quality of life and contribute to a better society (Sandel, 2009). Consumer–producer relationships may be predatory or collaborative (Mulgan, 2013), and the VSM can be applied to explore strategies to reduce the former and increase the latter.
While current digital technologies have the potential to increase an enterprise’s relationship capabilities (Teece, 2008), the consumers’ competencies for engaging in relationships and making choices are strained. As argued in the previous section, product variety may overwhelm customers’ cognitive capabilities. This makes it necessary to redress imbalances so as to make more sense of the markets. Too much choice may paralyze individuals’ decision-making, leading to a waste of resources and possibly to psychological dissatisfaction (Schwartz, 2005). People find themselves under pressure to choose, yet may lack the time for good decisions. The challenge is to enable behavioural options between satisficers, who accept whatever product is vaguely satisfactory, and optimizers, who become increasingly paralyzed by a decision space beyond their evaluation capacity. The variety operators underpinning this relationship need to be improved; between poor option discrimination, which reflects a chaotic choice space, and no choice, because of cognitive paralysis, there is a space of manageable complexity or guided self-organization to balance customer–producer relationships at a mutually acceptable performance rate (Boisot and McKelvey, 2010; Gerschenson, 2015). From a complexity management perspective, when the variety of stimuli is too high and the variety of responses is inadequate, the relationship is in need of better variety operators.
To maintain a viable relationship with customers, that is, to maintain long-lasting interactions, a producer needs, as it absorbs their disturbances, keeping key inner variables within acceptable limits. For a necessary performance, as argued previously, because the constraining imposed by the LRV, their interactions will be the outcome of self-organizing processes. Attenuators and amplifiers between prosumers will evolve as permitted by the circumstances; however, guided self-organization such as that provided by policies and regulations, as well as by cohesion and coordination, and the VSM’s structural recursion, may enable creating favourable circumstances to speed up the evolution of effective variety operators (Beer, 1979; Espejo, 2015a, 2015b). To unleash value cocreation, beyond value creation, effective communications within producers and consumers as well as between these interacting parts are necessary (Figure 1). This implies communications between autonomous consumers and producers adjusting to each other over time. The challenge, from the perspective of variety engineering, is enabling effective producers and consumers that make their value cocreation with each other more effective. It is necessary to find variety amplifiers and attenuators that match the producers’ and customers’ varieties at levels that create mutually desirable meanings and performance. This focus on the inner structures of producers and consumers is necessary for effective markets. Detailed examples of this are illustrated in the to this paper.
The VSM points at two recursive prosumers relationships; one focused on the ‘outside and then’ and the other on the current challenges in the market.
One very challenging relationship between a producer and its potential customers is that that is necessary to maintain viability in the long term. This relational loop is dominated by unknowns. A producer’s good cybernetics requires guided cognitive, conversational and structural variety operators to perform in a world that is yet to be constructed. In cybernetic terms, the producer should anticipate multiple homeostats with unknown consumers by distributing and aligning its problem solving in its potential markets (Espejo, 2009). This would be the case for a producer, say any technological company, interacting with organizations relevant to its economic, social, technological and ecological future. Their long term requires developing recursive stable interactions with agents anticipating disturbances on these domains and potentially shaping their future markets. The term ultrastability describes a system that is able to maintain the stability of its essential variable despite unforeseen disturbances (Beer, 1981). These are relations of a performative nature, rather than the outcomes of representational models about the future. They therefore depend on robust recursive organization structures anticipating and creating potential consumers; in short, ultrastability requires an anticipatory organizational structure rather than representational competencies (Pickering, 2010). These are important variety operators of a viable system.
The other type of relationship includes the operational relations between producers and customers that focus on aspects such as sales, market share, services and customer satisfaction. Among other aspects, such emerging relationships aim to reap the benefits of strong brands and distributed networks. Operationally, the prosumer relationship is constituted by a variety of homeostatic loops, such as one-to-many loops between an enterprise and multiple retail customers, and one-to-one loops between a consumer and a producer. From a complexity perspective, in the former situation, consumers are likely to be the high-variety side; in the latter, the producer is on this side. For design purposes, working out who is on the higher and who is on the lower variety side always requires clarifying the purpose of the relationship – or in terms of second-order cybernetics, bringing the observers within the loops. However, in practice, these are self-organizing relationships, often with poor variety management; we therefore argue that value cocreation can be improved through the design of variety operators, in particular through recursive relations that account for the producer’s distribution of discretion and resources (cf. Viplan Method in Espejo and Reyes, 2011). Digital technologies, such as information and communication systems, are increasingly making possible guided self-organization to improve the quality of variety adjustments between the parts (Tapscott and Lowy, 1998; Rust et al., 2010; Pentland, 2014).
The principal argument for the aforementioned two relationships is the need to consider the functioning of homeostats: how does the LRV assert itself in each occasion? How does self-organization adjust the complexity asymmetries of the ongoing relationships (Holten and Rosenkranz, 2011)? Which of the constituted amplifiers and attenuators can be changed or improved for better relations? Answering these questions provide a platform for the design and guidance of self-organization.
In the variety balance template depicted in Figure 1, we propose a generic model of a prosumer homeostat, highlighting the variety operators underpinning this relationship. Figure 1 is offered as a very general model, which is neither in a diagnostic nor in a design mode. The purpose of this model is a relational showing of the variety operators reducing the high variety on one side of the relation into the low variety of the other, and vice versa. The detailed illustration of variety operators is carried out in this paper’s.
In the next section, we offer criteria for modelling variety operators. Guided by the LRV, we discuss strategies to make cocreation more manageable. As argued before, it is natural to experience complexity asymmetry, and therefore, variety operators of one kind or another will appear in any situation. It is not unusual for self-organization to operate against value cocreation in the short term: for instance, high variety customers may implement information systems that increase their variety vis-à-vis the producer, rather than reducing it, increasing the producer’s difficulty in matching their variety. This situation decreases the chances of effective communication and desirable performance. As argued before self-organization produces variety operators of one kind or another; the example of counterproductive information systems illustrates something that is not uncommon, that is, the dysfunctional use of operators that need improvement, and for this learning and design are necessary.
Guidelines for Value Cocreation
The LRV and the design of communication channels lie at the centre of any application of the VSM. These channels embody the variety operators between producers and consumers. If these interactions change or adjust the inner stabilities of producers and consumers, then they are engaged in learning loops with the potential to improve their variety operators. Their recurrent communications produce shared conceptual and operational languages (Espejo, 1994, Holten and Rosenkranz, 2011), increasing the possibilities of value cocreation. Improving communications is an ongoing process of reconstituting variety operators. Technological channels per se are not variety operators: it is the prosumers purposeful use of these channels in operational situations that makes them variety operators. Figure 1 offers a generic illustration of this.
No digital technology is an attenuator or amplifier in itself: what is needed is, for instance, a producer who understands an operational situation and interacts with consumers who also understand, from their perspective, the shared operational situation; as this happens, they constitute variety operators in between them. Clarifying purposes requires shared linguistic communities. The lack of shared languages increases coordination problems and puts more pressure on guiding the self-organizing processes; the value propositions of producers and consumers are less likely to influence their relationships.
Figure 1 offers a template for improving these communications from the perspective of the LRV and variety operators. It is a variety balance model of structural couplings (Beer, 1985; Maturana, 2002; Espejo and Reyes, 2011); it offers a template for improving complexity management in situations where the interacting parts have inadequate variety operators. As long as these parts accept maintaining interactions between them, the complexity asymmetries trigger variety operators that balance their interactions for tacit or explicit performance criteria. For variety engineering, we discuss three interaction requirements to make more effective variety balances:
1. Residual variety and effective organization. Producers can do more with fewer resources through an effective organization structure (Espejo et al., 1996). The VSM is a construct for guiding self-organization and self-regulation within organizational systems. It provides heuristics, that is, guides, to enable its adaptation, regulation and cohesion. A producer with an effective organization increases the complexity of its relations with customers at the same time that reduces the variety that customers have to deal with. This works in two directions: a producer dealing with chaotic, disorganized customers has to deal with much more variety than a producer dealing with organized customers, with the capacity to articulate among themselves demand variety. This is a reflexive situation where, for instance, customers form associations supported by social networks to articulate their needs and requirements, and producers focus their recursive autonomous units on geography, products and market segments. Associations absorb variety among themselves before articulating their requirements. At the same time, the producer’s structural mapping of these associations signposts self-organization. This point is expressed by the circles in Figure 1: the producer’s purpose in its interactions with customers is value cocreation. The producer (low-variety side; LVS) and the consumers (high-variety side; HVS) engage in interactions driven by sense making, product tailoring, customer loyalty and other performance factors. Thus, a key strategy for producers and customers to manage the variety emerging from their interactions is self-regulation and self-organization. Both self-regulation and self-organization are natural to interactions, but fostering policies that increase the prosumers’ self-organization and self-regulation increases the chances of good interactions between them; it guides effective self-organization. This strategy decreases the variety that the other side needs to attend to in their interactions, while simultaneously increasing performance in these interactions. Producers need to deal only with the residual variety that consumers leave unattended, and vice versa.
2. Market variety operators. In Figure 1, the prosumers’ communications are mediated principally by market variety operators, that is, by external (to both of them) amplifiers, attenuators and transducers between them. Prosumer communication is enabled or obstructed by market variety operators. Markets can amplify and/or attenuate the variety of prosumers. They may amplify the producer’s variety to increase the likelihood that products reach the intended customers. They may attenuate variety to make more meaningful products to users (e.g. by creating brands). They attenuate the consumers’ variety to make demand more meaningful and manageable. They amplify consumer’s variety to clarify their requirements and needs. These variety operators are mostly self-organizing; they happen de facto more or less effectively, but in complex societies they may also require management and regulation. The more effective the management of contextual variety, the more effective will be the absorption of prosumers’ residual variety and relational performance. Digital technologies are now playing a significant role in this management (Tapscott and Lowy, 1998). The examples of Google, Amazon, Alibaba and many others illustrate this role of digital society.
3. Transducers. Prosumer communications take place at transduction points. Prosumers disclose their worlds through language and need transducers to communicate with other language communities, such as those of consumers. Value cocreation is an outcome of coordination of actions, that is, of communications between prosumers. These are processes maintaining their essential variables within acceptable levels.[Note 4] Transducers make producers’ signals increasingly meaningful to customers and customers’ signals increasingly meaningful to producers. Transducers underpin the sharing of linguistic codes from one community to the other. Transduction is necessary as signals directly or indirectly cross the producers’ and customers’ boundaries: they adjust ontologies, making signals more meaningful to the receivers. They are at the core of articulating shared distinctions or eigenforms/eigenvalues in their interactions. Holten and Rosenkranz (2011) have demonstrated that forming these language communities is only possible to human agents.
Figure 1 thus illustrates a homeostat through which a producer may develop stability in its internal environment in response to the customers’ requirements and also, in general, in response to unpredictable disturbances. The effectiveness of this homeostat can be empirically diagnosed by recognizing de facto variety operators and the value cocreation spectra – or performance – emerging from the prosumers that form the relationships, yet it also needs to be designed to make market relationships more effective. Today’s big data is making it increasingly feasible to recognize this spectrum (Pentland, 2014). The aim is to enhance value coproduction by improving the quality of the variety operators. This requires designing fit-to-purpose variety operators that are aimed at increasing the chances of meaningful communications between prosumers. Communications are at the core of value cocreation.
Aligning purposes to achieve a desirable transformation and a meaningful performance drives value cocreation. Possible performance criteria are
increasing customer loyalty by developing customer satisfaction;making sense of the product and creating symbolic meanings of the product that satisfy customers’ inner psychological and social desires; and
tailoring products to customer’s needs; the customer’s needs may be explicit (coming from a specific request or set of requests) or tacit, in the case where the customer is not already aware of the benefit that may derive from the consumption of the product (as in the case of the iPad, when it was created but had not yet become available on the market).
More demanding performance criteria require more sophisticated internal and external variety operators. Value cocreation involves prosumers’ ongoing communications through the markets, which are constituted, among others, by social agents and technological mechanisms. The contextual variety of these communications is mostly self-organized, but it is also guided by institutional (e.g. governmental) policies and regulations Chang (2010). Today, in the digital society, these variety operators are allowing an increasing situational resolution in these communications (Pentland, 2014).
In Figure 1, the producer manages variety coming from customers’ outputs that are summarized in the ‘customer value proposition’, while customers need to manage the variety of product offerings coming from the stream of the ‘producer’s value proposition’. These are mutually modifying communications that constitute learning loops. They are made up of variety operators that are illustrated in the that follows. These variety operators can have, among others, structural, conversational, cultural and informational expressions. In practice, there are a large number of prosumers variety operators (i.e. numerous templates like that illustrated in Figure 1) – some fit-to-purpose and others not. The purpose of Figure 1 is to guide good variety engineering processes and in this way improve performance to make the markets more transparent and to enhance communications and value coproduction between prosumers.
The producer (i.e. the low-variety side in Figure 1) is an organizational system creating, developing and producing ‘value propositions’. Its capabilities are embodied in its structure, that is, in its resources and relations. The better the producer’s capacity to generate and absorb variety within itself, the better is its inner homeostats supporting the necessary checks and balances (cf. the VSM), and the smaller is the residual variety necessary to communicate value propositions to consumers. A weaker structure generates less effective value propositions, making communications with customers vague, unclear and more difficult overall for value cocreation. We propose the VSM as a heuristic to increase the chances of value cocreation. For guided self-organization, the producer’s variety must be designed to creatively absorb the customers’ value propositions, as well as to generate its own value propositions. The producer’s dynamic capabilities and the customers’ desires drive these propositions. Of course, in a situation with new product development, value propositions must go further than merely responding to customers’ requests. For instance, Apple’s customers did not know the iPad before its value proposition (as a mix of symbolic, hedonic and functional values) was created and communicated to them. Therefore, the ‘producer value proposition’ can be much more than a simple deduction of customers request; it can be an abductive inference (Peirce, 1958; Barile, 2009) that enhances creativity and the producer’s dynamic capabilities to develop a new product that anticipates customers’ needs, meeting their inner desires.
Conclusions and Further Research
We have shown how the idea of value cocreation can be considered a communications construct; it requires the structural coupling of producers and consumers in the quest for product development and innovation.
We have shown how, from the perspective of second-order cybernetics, the market arena is the physical or virtual place where communications of value propositions produce eigenforms driving the eigenbehaviours of producers and customers towards shared meaningful objects. Eigenforms arise from considering objects (e.g. products) as tokens driven by eigenbehaviours – that is, as tokens for communication processes that make these objects increasingly meaningful to prosumers as tokens for value cocreation. Both producers and consumers reflexively observe their relations with each other through the products that are the objects of their communications. In this context, the increased resolution of their evolving variety operators, provided by more sophisticated social structures and digital technologies, are the platforms for the eigenforms of value cocreation.
This theoretical paper has aimed at clarifying the complexity implications of value cocreation. Variety operators and requisite variety have been explored in some detail in order to make them more meaningful to the reader; we are, however, aware that further research is needed on both the methodological and empirical levels. Indeed, while all structural and interactive practices can be construed as variety operators, getting value out of them requires approaches for their diagnosis and design. It is necessary to study practical methods to involve prosumers as participant observers in the modelling of meaningful variety operator loops for current levels of performance. These must be designed and implemented to permit prosumers’ evolution towards desirable performance. However, a break in their interactions is the ultimate proof of lack of requisite variety in their interactions; what we referred to as a characteristic negative explanation of cybernetics.
As prosumers’ structural couplings evolve, eigenvalues emerge from their communications. We have postulated that prosumer eigenbehaviours evolve as spectra of products, whether objects or meanings. With the advent of big data, we can anticipate empirical measurements of these unfolding spectra. These measurements may be a powerful means of anticipating products’ evolving paths, as well as new products and innovation in general.
Appendix
In this appendix, we illustrate variety operators in more depth for prosumers in processes of value cocreation. Further methodological support is necessary for both modelling and assessing them. Nonetheless, these examples should enhance the reader’s appreciation of variety operators in marketing situations.
Low-variety side (LVS in Figure 1) producers’ variety attenuators and amplifiers are driven by the viable systems model. More specifically, instances include task breakdowns, rules, constraints on product design, operational constraints and standardization. One example of an attenuator is a producer’s capacity for mass customization. Once the required demand characteristics are known, the producer can attenuate the variety necessary to satisfy the specific customer’s requests by using standard components and procedures for assembling, say, a computer (mass customization). An example of variety amplifiers in the producer’s structure is the complexity required to effectively incorporate customers’ suggestions for product design, which must be able to consider the volatility of consumer behaviour and the trend towards fewer barriers between producer and customers. In a diagnostic mode, the viable systems model allows visualization of poor variety operators, while in a design mode, it functions as a heuristic to improve these operators.
Input and output transducers make communications intelligible by decoding and coding the information that crosses boundaries.
Producer’s transducers include:
For the inputs:
the demand structure that must be interpreted by the producer’s organizational structure;the cultural aspects of consumer behaviour, which need to be understood by the management of the firm;the e-commerce platforms through which customers’ requests are interpreted and classified so as to be coupled with the producer’s supply capabilities; Looking, for example, at the pivotal case of the mass customization of Dell computers, one important input transducer is the e-commerce platform through which the customer can create and personalize the required product.social networks, such as blogs, Facebook pages, etc., which need to be ‘decoded’ to gather useful information for product design.
For the outputs:
Branding; a message that must be codified in order to be understood by customers, considering also the symbolic meaning of the brand for the construction of sense;Market specialists, guiding the producers’ information to the market targets;Social networks
Market variety attenuators of the high-variety side (HVS in Figure 1) include
Intermediaries. Market agents can work for the attenuation of variety on both sides (customers and producers), depending the kind of intermediation; for example, brokers for the attenuation of information variety (on both sides) and dealers for a number of variety types (e.g. financial, selection and information)Artificial Intelligence for managing conversations. Artificial intelligence applications may be useful tools for reducing the variety coming from online conversations on the Internet and making them intelligible to the producer, as well as for creating answers to customers’ queries.Acknowledgment of consumer culture and consumer tribes. Knowing the culture of consumers makes it possible to acknowledge cultural schemes to reduce variety. Moreover, consumer tribes – as systems of values of customers groups – reduce the variety that needs to be understood by the producer and simplify the communications with consumer tribal groups. So when a product has the symbolic potential to create a consumer tribe, this should be encouraged by the producer, in order to foster the ability to manage communications with the customers (e.g. Harley Davidson or Ducati bikers’ clubs)Heterogeneity of legal rules in different markets (e.g. different countries’ regulations or different regulations for different sectors).
Market variety amplifiers of the low-variety side include
Intermediaries. Market agents can work for variety amplification. For instance, companies can use dealers and distributors to make their products available to customers.
Variety of digital interactions. Internet and mobile communication and their consequent interactions can occur through a growing variety of applications that increase variety that cannot be easily controlled by either side. For the producer, managing the enormous and ever-growing conversations with customers may be a challenge to its capabilities. For the customer, the producer’s different ways of communicating value propositions can create the ‘paradox of choice’ and paralysis (e.g. mobile phone or pay TV promotional prices).
High-variety side (HVS in circle in Figure 1) consumers’ variety attenuators and amplifiers are driven by self-regulation and self-organization. Customer associations offer the chance for this. Quality associations manage the variety of product offerings coming from the stream of ‘producers’ value propositions’ in order to be able to be engaged in the value cocreation process. Consumer rights associations, consumer culture, and cognitive style: these are tacit attenuators, through which the customer reduces variety to couple it with his or her inner values and desires.
Customers’ transducers include
For the inputs:
Apps for managing choice. There is a number of purchasing digital tools that simplify the choice of the customer. These tools are made to guide the customer through the high variety of product offerings, reducing the variety with keywords that address the specific needs of the customer (e.g. eDreams for flights)Internet and mobile communications, which include every communication that may reach the customer through digital media.Traditional media communication and advertisement.Consumer groups and tribes. Are noncommercial communications coming from interaction with consumer groups and tribes?Word of Mouth (WoM): This can be a most effective means of communication in terms of consumer behaviour (Herr et al., 1991), but also can be a very difficult transducer to control, on account of its high complexity. This is both an input and output transducer.Heterogeneity of product offerings. As in the ‘paradox of choice’, consumers can feel overwhelmed by an excess of variety in product options, leading to the paralysis of maximizers in a decision space that is large beyond their ability to assess.
For the outputs:
Search engines. Through keywords and advanced algorithms, search engines can reduce the customer’s variety of possible choices. In this category, we also include search engines on online shops (as for instance the internal search at amazon.com or booking.com).
Data about purchases: trends in this can be an important clue to consumer value propositions.
Blogs and social media. Customers can express their opinions on a variety of digital media and apps; this information is relevant for the customer value proposition.
Word of mouth.
Data on complaints: these are explicit communications shaping the customer value proposition.
Posts on blogs and social media.
Personal tacit desires
Purchase choices
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Endnotes
1
Variety was defined by Ashby (1964) as the number of possible states of a situation and proposed as a measurement of complexity. For instance, the variety of a traffic light is 8. 3 lights, each with two states ON/OFF.
2
In general terms, variety operators are structural, conversational, operational, informational and other amplifiers and attenuators of variety, but additionally bridging complexity asymmetries also require ‘transducers’, which are media that transform signals from one expression into another expression that is more appropriate to the receiver. Variety operators are discussed later in this paper and also illustrated in its Appendix.
4

These are the variables that need to be maintained within operationally (physiologically) acceptable levels for the viability of the organizational system (Ashby, 1964).
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