Co-creation springs from a sense of common purpose
Too often the question of value extraction/retention is a dominant concern for all parties at too early a stage. For the sake of argument, let’s consider a supplier who has to develop a critical component for a customer who will integrate it in the design of a new finished product. The development process has not yet started that the customer plays its cards close to its chest with the conscious objective to retain as much of the value they will get from selling the finished product, and the supplier plays in a similar way with an equally conscious objective to extract as much value as possible from selling their component to the customer.
As a result, the supplier does not share unique knowledge for fear of losing leverage, the customer does not seek what could make the product unique for fear of tying itself to a particular supplier, and a great deal of time and effort is invested in crafting legal frameworks for knowledge sharing that anticipate on everything that could go wrong. But in reality, the biggest risk they run (without recognising it) is that while they position themselves for future negotiations some competitors will move faster and take the market.
I’m not arguing that value should not be considered, but if no value is created in the first place, the question of value extraction/retention becomes pointless. A more effective co-creation process should start with the recognition that value has to be co-created FIRST, and only THEN can it be shared (note in passing that ’share’ is a verb more conducive of cooperation than ‘extract’ and ‘retain’). In other words collaboration will be fostered by a mutual acknowledgement that all parties have a common interest: the finished product needs the critical component, and the critical component will be a commercial success only if it gets into a finished product that becomes a commercial success. Both supplier and customer are on the same boat.
Having reframed all parties’ mindset to focus on value creation, common success factors such as creating differentiation and accelerating time-to-market become co-creation drivers and full-scale collaboration can be unleashed.
Finally, when the time comes to negotiate how to share the value that has been created, none of the parties has damaged its position by putting aside the traditional extraction/retention mindset during the co-creation phase. They have now all invested in a project that is about to be launched in the market and generate revenue, they all know that it would be a waste to go to competition and restart the process, the incentive to agree has increased for all of them: the balance of power has hardly changed but the sense of common purpose has grown. Finding a fair value-sharing mechanism has just become more relevant and easier.