Service Innovation Music Industry

8/12/2019 Service Innovation Music Industry

1/20Electronic copy available at: http://ssrn.com/abstract=1440729

Integration of Customer Knowledge for the Generation of Service Innovation in the Music Industry


2/20Electronic copy available at: http://ssrn.com/abstract=1440729

Supporting Service Innovation Through Knowledge Management

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Integration of

CustomerKnowledge for the

Generation of

Service Innovation

in the Music

Industry

Selma

Borovac,

JoannaGolata, Tobias

Mller-

Prothmann,

Edda Behnken


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music industry, knowledge management, service

innovation, customer integration, organisational learning,

idea generation

Music inspires emotions and is listened to by people in several situations like sadness,

happiness or just for relaxing. The music industry has its roots in the invention of the

phonograph by Thomas Edison in 1877. Today, this industry needs to permanently reconsider

its services to offer different products and services to satisfy growing customer expectations.

Fueglistaller (2007) describes the future challenges for service innovations of the music

industry as the necessity to acknowledge the growing customer needs and to enhance the

customer benefit concerning the service offers, while also considering and improving the

companies (p. 117).

For years the music industry provided only physical media. Since the internet emerged as a

global distribution platform, music became more and more digitalised and a lot of illegalmusic file sharing communities came into existence. The most common and well known

music format is MP3, developed by the German Fraunhofer in the early 1980s and

established as a common standard in the early 1990s. In 2001 first legal online music and a

compatible device the iPod were offered by Apples iTunes music store. Experts are still

expecting a rapid growth of this business and a lot of technology companies, telcos, internet

service providers (ISP), retailers, e-tailers and special digital content services have started to

provide online music services. Since 2006 mobile music services have also been made

available to customers.

However, the business volume of music industry has been steadily decreasing since 2001.

This negative growth is caused by a significant decline in physical music sales. The industry

seems to have lost the awareness of changing customer behaviour. Since 2003 the share of

digital music has been growing but the music industry has not been able to compensate the

drop in music sales resulting from illegal music sharing over the internet. According to the

International Federation of the Phonographic Industry (IFPI), in 2007 sales figures showed a

total of 19.4 billion Euros worldwide. Compared with 2006 this is a decline of 8 per cent. The

digital sector represents 2.9 billion Euros of this amount, 47 per cent were generated via

online and 48 via mobile sales channels. The number of music files which were downloaded

illegally in 2007 was 312 million copies (IFPI). But piracy is not the only problem of the musicindustry.


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Figure 1: Music revenues in Western Europe (Amel and Cryan, 2006; p. 14)

There are still many unsolved problems: the digital music market is a new and growing

market and customers need to be convinced that the service is a great idea. Therefore,

service providers have to be constantly aware of customer needs and come up with solutionsto track and evaluate customer satisfaction. One of these solutions can be a combination of

marketing and knowledge management issues. For instance, to convince a customer to adopt

mobile music services, word-of-mouth marketing (BUZZ) is one of the methods which could

be used. The required knowledge about customer behaviour can be gathered by the

following methods: monitoring of customers while they are using the product, customer

surveys and interaction with customers as well as integration of customers into an idea

generation process.

Innovation Problem

Todays literature commonly defines service innovation as a new service development which

involves changes in the process of delivering existing services or the generation of new

services (Leiponen, 2005). The basic characteristics of service innovations are integrity and

immateriality, whereas integrity relates to the circumstance that the creation of services

integrates external factors of production and immateriality is dedicated to the process of

value performance (Corsten, 2002).

7,000

7,500

8,000

8,500

9,000

9,500

10,000

10,500

11,00011,500

12,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Western Europe total

of which online


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Service innovations and knowledge are both intangible resources, for which reason it is

difficult to evaluate them. Herzog (2008) pointed out that the distinction between service

innovation and knowledge is the extension to which they can be offered. For instance,

whereas music services are exchangeable and through that measurable, a specific customer

knowledge experience or the customer tacit knowledge can hardly be made explicit (Herzog,

2008). Companies meet the challenge to find a way to externalise the knowledge of their

external partners or customers by introducing methods/approaches of idea management

(Mller-Prothmann, 2008). Idea management within companies is mainly internally focused.

This point can be seen as one of the problematic factors, because the internal focus makes

companies inflexible (Mller-Prothmann et al., 2008). Another reason is that most of the

companies still ignore wishes of customers and invent products the customers do not need.

The so-called over-engineering by mobile phones is one of the examples for too many

features customers do not use (Wildemann, 2008).

Vermeuten and van der Aa (2003) have identified two categories of service innovations:

(1) replication innovation and (2) the new roles for the customer. For the first category

replication innovation, learning and innovation experiences of a company are key points for

the development of service innovation. The category new role of customers describes the

role of the customer as a co-producer of service innovation. However, the scope of this role is

wide ranging because the borderline between the activities of the producer and the activities

of the customer are flexible (Vermeuten and van der Aa, 2003, page 50). Some companies

create ideas for products/services in cooperation with their customers. In other cases

customers create ideas more or less by themselves.

Digital music as a service innovation is a part of music industry; but it is a new market and

not completely comparable with the usual physical market. It differs in hardware, format,

distribution channels, business models, and pricing. Furthermore, there are also differences

between online and mobile music services.

Digital music is addressed to people having a strong affinity for the internet. Older adults

often do not know that digital full track music exists. Another problem is that people are not

aware of the economic value of music and the fact that they have to spend a certain amount

of money for it. The reason of this mind setting is high-level piracy that has been established

since the internet revolution. For years people were able to download music in peer to peer

networks for free but the industry came up with various business models to offer digital

music within a legal framework. The most common is single purchase, a model people

already know well, followed by single purchase bundles where customers buy an amount of

songs for a lower price than usual. A more advanced business model is rental customers

pay a periodical fee and get access to the whole or a part of a music catalogue for the time

of payment. Rental models are seen as the future and preferred by solution providers, but

these models are not yet well accepted by customers. People are still used to own things they

pay for. Due to discrepancy, music service providers steadily develop variations of business

models, e.g., Nokias come with music. It allows customers who purchase a Nokia handset

to download and listen to an unlimited number of tracks from the Universal catalogue for up

to 12 months after purchase, free of charge and to keep songs they like.


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organisation. The integration of knowledge management into innovation management

processes needs to address knowledge exchange on all of these levels and between them

and must allow consequently feed-forward and feed-back learning. Institutionalised

knowledge affects groups and individuals within the organisation (feed-back process).

However, forward and backward learning does not only affect the different levels of learning

but might be seen as a suggestion on how to use knowledge gained in different projects,

products and services. Forward and backward knowledge sharing illustrates how knowledge

and experiences might be used across different product or service lines.

This chapter provides an overview of music industry and the management of new services. It

is focused on issues and problems of the music industry. For this reason we introduce

different knowledge management methods to collect the information needed from the

customer in order to generate service innovations.

Knowledge Management for Service Innovation

Knowledge is an important resource to create innovative ideas and to increase the business

volume. The acquisition and management of knowledge allows companies to gain competitive

advantage. Knowledge management contains organisation, processes, methods, and tools,

with the aim to systematically develop, capture, allocate, retain, use, and evaluate the explicit

and implicit knowledge of the product development (Kahlert et al., 2004). Through constant

organisational learning, as a complex dynamic process whose drivers are the employees ofthe company, new knowledge can be used for a generation of new services. Becker and

Langosch (1995) referred that the individual repository of knowledge is part of an individual

learning process. These individual repositories are converted into organisational ones which

are finally independent of employees and become part of the organisational memory.

The learning process in companies can be facilitated in many different ways:

Five-phase model of the organisational knowledge-creation process

Learning by interaction

Learning by watching a model

Nonaka and Takeuchi (1995) already emphasised in their five-phase-model of the

organisational knowledge creation process the role of the customer for the generation of

innovations (cf. figure 2). This model considers the transformation of tacit knowledge of

individuals (employees within companies) into explicit knowledge through socialisation and

collaboration with customers and other companies.


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Cross-levelingknow-ledge

Buildingan arche-

type

Justifyingconcepts

Creatingconcepts

Sharingtacit

know-ledge

Tacit knowledgein organisations

Explicit knowledgein organisations

Enabl ing conditionsIntentio n, AutonomyFluctuation / Creativechaos, Redundancy ,Requisite variety

Socialisation Externalisation Combination

Internalisation

Fromcollaboratingorganisations

Market

Tacit

knowledgeFrom users

Internali sation by users Explicit knowledge as

advertisements,patents, product and/orservice

Cross-levelingknow-ledge

Buildingan arche-

type

Justifyingconcepts

Creatingconcepts

Sharingtacit

knowledge

Tacit knowledgein organisations

Explicit knowledgein organisations

Enabl ing conditionsIntentio n, AutonomyFluctuation / Creativechaos, Redundancy ,Requisite variety

Socialisation Externalisation Combination

Internalisation

Market

Figure 2: Five-phase Model of Organisational Knowledge Creation (Nonaka and

Takeuchi, 1995)

Tacit knowledge of individuals is extended within companies. The first phase starts with

sharing the tacit knowledge which complies with socialisation. This phase is followed by the

externalisation through teams who convert their explicit knowledge in the form of new

concepts. These concepts justify the third phase which is converted in the fourth phase to an

archetype. This archetype can be not just products, but also development of service

innovation. In the last phase, the created knowledge will be amplified across other divisions

of the company or by customers, suppliers and universities (Nonaka and Takeuchi, 1995). All

five phases start with new knowledge collected from employees and external sources.

Besides this classical model of an organisational knowledge creation process, there are some

other models which should be taken into account. Learning by interaction is a social kind of

learning. Positive or negative experiences, which occur in direct interaction between at least

two people, are the basis for a learning process. Especially tacit knowledge needs learning by

interaction, being transferred from one person to another (Behnken, 2005).

By interacting with the customer in workshops, communities or even visitation of the

customers work environment, new ideas for service innovations emerge.

Reckenfelderbumer and Busse (2006) pointed out that customers of service innovation do

not only use the final product (outcome), but as co-producers also play an important role

with regard to potentials and processes.

Learning by observing a model describes a learning process which is initialised by an impulse

given by a model. The customer plays the role of the model. Applying this learning approach


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gained from customer experiences and new services are created to satisfy customer needs.

As a benefit, customers obtain a new product or service.

Jamba started its digital music service in Q4 in 2006 and was the first mover within

subscription music services on mobile devices. The company quickly realised issues of the so

called over-engineering of mobile devices and started to run knowledge management whichincludes customer surveys, monitoring of customers while using the product and one-to-one

interviews to optimize and develop the service.

The Analysis

Knowledge about potential service demands or improvements of existing services are needed

as input for the service innovation process. There are a lot of knowledge management

systems (KMS) in companies which support the interaction and collaboration between

employees. In many cases, however, the interaction with the customer is not supported by

these KMS due to different reasons, for instance the lack of understanding of importance or

security reasons. Therefore, KMS are often seen as delivering insufficient impulses needed for

creating service innovation.

Therefore, we propose here to gather the required information by applying the following

methods:

Customer surveys

Monitoring of customers while they are using the product

Interaction with the customer and integration of customers in the innovation process

Jamba a worldwide mobile content and digital entertainment provider offers a full track

music service for mobile and computers since the fourth quarter of 2006. Customers are able

to buy or rent music from an extensive music catalogue of almost 2 million songs. The music

can be listened to on both devices due to an automatic synchronisation system.

Jamba uses three tools:

Survey

Figure tracking

Usability lab

The next paragraphs present knowledge management methods and practical tools used by

Jamba in their service innovation processes.


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behaviour anonymously. The usage of different tools allows the company to monitor

customers behaviour from different perspectives and provides an idea of possible reasons

why a service is used or not.

Software tools allow tracking customer behaviour on web / WAP sites and the whole order

flow. For example, participants use the feature search, but write the song or artist wrongand are not able to find what they are looking for. Out of these conclusions, innovations like

automatic suggestion or automatic correction can be generated. The tracking tools can be

used to check every ongoing process like implementation of a new campaign or feature.

This is a quantitative method which helps to see the success factors and problems of a

service. It delivers indicators of problems with a service, but does not always give an idea of

the reason why a problem exists.

Interaction with the customer and integration of customers in theinnovation process

There are a lot of terms for customer integration that can be found in literature such as co-

producer, partial employee or customer participant. A standardised technical term for

customer interaction or rather integration is lacking. Customer interaction contents the

combination of customer knowledge and information which are disposed to allocate to the

company (Reichwald and Piller, 2006). Von Hippel has developed two paradigms; customer

active paradigm (CAP) and manufacturing active paradigm (MAP). The role of customer inMAP prosecutes the principal speaking only when spoken to (Von Hippel, 1977; p. 3). In

CAP the customer can be integrated in the whole innovation process, from generation to

commercialisation.

The tracked figures are indicators of acceptance and usage of the service. For identifying and

solving problems of its service Jamba owns an in-house usability lab. The lab is also used for

testing plausibility of the service during the development. Usually the service development

team knows its project parameters very well, but is not aware of whether the service is

usable or not. They often tend to over-feature a service or product. Especially for mobile

phones it is important to choose the right features for the small screen and make them user-friendly.

In both cases the company runs anonymous one-to-one interviews with participants.

Interviews are used as a quantitative method at Jamba. It depends not on quantity, but on

quality of the findings. The company usually concentrates on 3 to 5 participant. There is an

equal story line for all participants, but it allows questioning and going into detail if required.

The participant recruitment is based on target group definition, e.g., age, internet affinity or

handset utilisation.

The company tests its service on mobile, computer or just on a piece of paper depending onwhat should be tested and how far it is in progress. Participants are told that there are no


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right or wrong answers and are requested to think loudly about the matters they are doing.

To get the best and most realistic findings it is necessary to observe participants while solving

a problem independently without any help of the observers. The most important thing is to

watch the reaction of the participants and not what they are speaking about. Participants

often are not able to articulate their expectations or feelings. For that reason Jamba uses

integrated tracking software in mobile and on computer or a video.

The outcomes are discussed by the product management, implemented in the service and

after that tested again. The usability lab outcomes do not afford revolutionary innovations,

but help to understand the customers behaviour and define explicit and implicit wishes and

make the service accepted. These outcomes are very service specific and practiceoriented.

Results and Business Impacts

Key Findings

There is no disagreement that customer integration supports knowledge as well as innovation

management of companies. In the previous chapters we have described some methods of

how companies can gather new knowledge from the customer. The combination of customerand employee knowledge brings new ideas for service innovation. Concerning the methods

and tools applied at Jamba for supporting service innovation with KM processes, our key

findings can be summarised as follows:

The outcomes of a survey are replenished and discussed by the product management.

Surveys provide a good overview of current mindsets of customers in several countries. A

survey is a good basis to create new ideas and innovations, but also complex and cost-

intensive. The base of a good survey is a good preparation a whole session takes up to two

weeks or even more. The objectives have to be clear and well defined. It is recommended to

split complicated questions into more than one in order to avoid confusion anddiscouragement of the participant. A survey should not take longer than twenty minutes.

Furthermore, it is important to have a sufficient number of participants from a broad sample

to get a realistic image of the market and customer needs.

Monitoring is a quantitative method. Monitoring results are just indicators of innovation

and/or errors. In addition, these results are also a source of misinterpretation and should be

considered just as support of other methods.

Usability lab outcomes do not enable revolutionary innovations, but help to understand the

customers behaviour and define explicit and implicit wishes and make the service accepted.

The outcomes are very service specific and practiceoriented.


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Outcomes of all these methods are very important to identify customer needs, but the results

need to be verified and not used in an isolated way. Especially quantitative methods like the

figure tracking are sources of misinterpretation.

Interviews or surveys have to be constructed carefully; however, it is difficult to formulate

questions which are understood by everybody in the same way. Sometimesmisunderstandings happen by inadequate formulation of the questions. Jamba experienced

that especially in one-to-one interviews people do not have a heart to ask if they did not

understand a question and give an incorrect answer. Interviewees are anxious and

demotivated for the rest of the questionnaire. Even the duration of an interview can

discourage the participants. Another barrier can be a missing openness in communication

which often causes mistakes. Usually participants are not familiar with these new services

and therefore, they have a lack of imagination of the future of development. They are only

able to give their current opinion and wishes.

Business Impacts

The design of interaction between customers and service providers is a complex process.

During this process, it has become increasingly clear that the objectives of Jamba should be

clearly defined before providing a service. Customers have a supporting function to improve

services or to give some impulses for new service ideas. Customer integration is not only

useful to obtain new ideas, but also to monitor whether customers acquired sufficient

knowledge to accept and use these new services. The phenomenon, like over-engineeringcould be avoided with consequent customer integration to maximise customer satisfaction. As

a matter of fact, it is important to integrate customers in service development processes that

improve plausibility and usability of services.

From a business perspective we always should take into account that sophisticated customers

are important for the generation of service innovations. However, although customers have

ideas for the improvement of services, development teams should not try to conform all

wishes; instead they should be able to learn.


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References

Amel, A., and Cryan, D. (2006) Online Music in Europe: Market Assessment and Forecast, ScreenDigest, Goldmedia GmbH.

Becker, H., and Langosch, I. (1995) Produktivitt und Menschlichkeit Oganisationsentwicklungund ihre Anwendung in der Praxis, Ferninand Enke Verlag.

Behnken, E. (2005) The Innovation Process as a Collective Learning Process, in Proceedings of11th International Conference on Concurrent Enterprising: Integrated Engineering of

Products, Services and Organisations,Mnchen, Germany, June 20-22, 2005, pp. 219-226.

Corsten, H. (2002) Controlling der Dienstleistungsproduktion, in Hoitsch, H. J., Lingnau, V., andSchmitz, H. (eds.):Aktuelle Aspekte des Controllings, Birkenhuser, pp. 49-72.

Crossan, M. (1999) An Organizational Learning Framework: From Intuition To Institution,Academy

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Drr, N., Behnken, E., and Mller-Prothmann, T. (2008) Web-based Platform for Computer AidedInnovation. Combining Innovation and Product Lifecycle Management, in IFIP 20th WorldComputer Congress: Proceedings of the Second Topical Session on Computer-AidedInnovation, Milano/Italy, September 710, 2008, Springer, pp. 229-237.

Fueglistaller, U. (2007) From Service Management towards Service Competence AnEntrepreneurial Approach, in Spath, D. and Fhnrich, K. (eds.): Advances in ServicesInnovations, Springer, pp. 114-127.

Ganz, W. (2007) Strengthening the Services Sector Needs for Action and Research, in Spath, D.,and Fhnrich, K. (eds.):Advances in Services Innovations, Springer, pp. 224-254.

Herzog, P. (2008) Open and Closed Innovation Different Cultures for Different Strategies,Gabler.

Kahlert, T., Langenberg, L., Marwinski, T., and Sell, K. (2004) Engineering KnowledgeManagement - Wissensmanagement in der Produktentwicklung, ZWF Zeitschrift frwirtschaftlichen Fabrikbetrieb, Vol. 99, pp. 7-8.

Leiponen, A. (2005) Organization of knowledge and innovation: The case of Finnish businessservices, Industry and Innovation, Vol. 12, pp. 185-203.

Mller-Prothmann, T. (2006) Leveraging Knowledge Communication for Innovation. Framework,Methods and Applications of Social Network Analysis in Research and Development, Peter

Lang.

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Mller-Prothmann, T., Behnken, E., and Borovac, S. (2008) Innovation Management Devils' ADisruptive Factor Based Analysis of Innovation Processes, in Huizingh, K. R. E., Torkkeli, M.,Conn, S., and Bitran, I. (eds.): Open Innovation. Creating Products and Services ThroughCollaboration, Proceedings of the XIX ISPIM Conference, Tours, France, June 15-18, 2008.

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Reckenfelderbumer, M., and Busse, D. (2006) Kundenmitwirkung bei der Entwicklung vonindustriellen Dienstleistungen eine phasenbezogene Analyse. in Bullinger, H. J. andScheer, A. W. (eds.): Service Engineering. Entwicklung und Gestaltung innovativerDienstleistungen: Entwicklung und Gestaltung Innovativer Dienstleistungen. Springer, pp.142-166.

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Author Biographies

Selma Borovac, Dipl.-Oek., studied economics at the University

of Bremen from 2002 to 2007. Her major was InnovationManagement and Technology, with the focus on the Open

Innovation Model. In February 2008, she joined Pumacy

Technologies AG, a leading knowledge management solution

provider, as a Project Leader for a research project of a disruptive

factor based analysis of innovation processes. Furthermore, she

supervises customer projects in the aerospace industry.

Joanna Golata, Dipl. Kffr., studied business economics at the

University of Bremen from 2000 to 2006. She focused on

Innovation Management and Technology and specialised on

Scenario Planning. In Q4 / 2006, she joined Jamba! GmbH, as

Innovation Manager. Later she worked as a Product Marketing

Manager for an innovative mobile and computer-based full track

music service Jamba Music and was responded for customer,

market and competitor analyses.


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Dr. phil. Tobias Mller-Prothmann, Dipl.-Soz., studied

sociology and political economics at the University of Heidelberg.

From 2000 to 2005, he was a research associate at the Institute

for Media and Communication Studies at the Free University

Berlin. He also worked as a freelance project manager, consultant,

journalist, and as a lecturer at the Institute of Electronic Business,

Berlin University of the Arts. From 2005 to 2007, he was head of

Department for Economic Growth and Innovation with an

influential German think tank. In 2007, he joined Pumacy

Technologies AG, as Team Manager Innovation Management.

Edda Behnken, Dipl.-Oek., graduated from the University of

Bremen with a Master of Sciences in Economics. Her main

research interests were in industrial and organisationalpsychology, innovation and network management. She worked as

a solution architect and consultant at Pumacy Technologies AG in

the area of innovation management and lead customer projects in

the aerospace industry. Now she is working as a project manager

at Sperlich GmbH in the area of network management, especially

in the carbon fibre composites industry.

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