Expert answer:case study
Expert answer:i need a case study for Creativity, Innovation and New Product Development class. Information attached
casestudyweek1.docx
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CASE STUDY 1
Exploring Innovation in Action: The Changing Nature of the Music Industry 1st April
2006. Apart from being a traditional day for playing practical jokes, this was the day on
which another landmark in the rapidly changing world of music was reached. ‘Crazy’ – a
track by Gnarls Barkley – made pop history as the UK’s first song to top the charts based
on download sales alone. Commenting on the fact that the song had been downloaded
more than 31,000 times but was only released for sale in the shops on 3rd April, Gennaro
Castaldo, spokesman for retailer HMV, said: ‘This not only represents a watershed in
how the charts are compiled, but shows that legal downloads have come of age … if
physical copies fly off the shelves at the same rate it could vie for a place as the year’s
biggest seller’. One of the less visible but highly challenging aspects of the Internet is the
impact it has had – and is having – on the entertainment business. This is particularly the
case with music. At one level its impacts could be assumed to be confined to providing
new ‘e-tailing’ channels through which you can obtain the latest CD of your preference –
for example, from Amazon.com or CD-Now or 100 other websites. These innovations
increase the choice and tailoring of the music purchasing service and demonstrate some
of the ‘richness/reach’ economic shifts of the new Internet game. But beneath this
updating of essentially the same transaction lies a more fundamental shift – in the ways in
which music is created and distributed and in the business model on which the whole
music industry is currently predicated. In essence the old model involved a complex
network in which songwriters and artists depended on A&R (artists and repertoire) to
select a few acts, production staff who would record in complex and expensive studios,
other production staff who would oversee the manufacture of physical discs, tapes and
CDs and marketing and distribution staff who would ensure the product was publicised
and disseminated to an increasingly global market. Several key changes have undermined
this structure and brought with it significant disruption to the industry. Old competencies
may no longer be relevant whilst acquiring new ones becomes a matter of urgency. Even
well-established names like Sony find it difficult to stay ahead whilst new entrants are
able to exploit the economics of the Internet. At the heart of the change is the potential
for creating, storing and distributing music in digital format – a problem which many
researchers have worked on for some time. One solution, developed by one of the
Fraunhofer Institutes in Germany, is a standard based on the Motion Picture Experts
Group (MPEG) level 3 protocol – MP3. MP3 offers a powerful algorithm for managing
one of the big problems in transmitting music files – that of compression. Normal audio
files cover a wide range of frequencies and are thus very large and not suitable for fast
transfer across the Internet – especially with a population who may only be using
relatively slow modems. With MP3 effective compression is achieved by cutting out
those frequencies which the human ear cannot detect – with the result that the files to be
transferred are much smaller. As a result MP3 files can be moved across the Internet
quickly and shared widely. Various programs exist for transferring normal audio files and
inputs – such as CDs – into MP3 and back again. What does this mean for the music
business? In the first instance aspiring musicians no longer need to depend on being
picked up by A&R staff from major companies who can bear the costs of recording and
production of a physical CD. Instead they can use home recording software and either
produce a CD themselves or else go straight to MP3 – and then distribute the product
globally via newsgroups, chatrooms, etc. In the process they effectively create a parallel
and much more direct music industry which leaves existing players and artists on the
sidelines. Such changes are not necessarily threatening. For many people the lowering of
entry barriers has opened up the possibility of participating in the music business – for
example, by making and sharing music without the complexities and costs of a formal
recording contract and the resources of a major record company. There is also scope for
innovation around the periphery – for example in the music publishing sector where sheet
music and lyrics are also susceptible to lowering of barriers through the application of
digital technology. Journalism and related activities become increasingly open – now
music reviews and other forms of commentary become possible via specialist user groups
and channels on the Web whereas before they were the province of a few magazine titles.
Compiling popularity charts – and the related advertising – is also opened up as the
medium switches from physical CDs and tapes distributed and sold via established
channels to new media such as MP3 distributed via the Internet. As if this were not
enough the industry is also challenged from another source – the sharing of music
between different people connected via the Internet. Although technically illegal this
practice of sharing between people’s record collections has always taken place – but not
on the scale which the Internet threatens to facilitate. Much of the established music
industry is concerned with legal issues – how to protect copyright and how to ensure that
royalties are paid in the right proportions to those who participate in production and
distribution. But when people can share music in MP3 format and distribute it globally
the potential for policing the system and collecting royalties becomes extremely difficult
to sustain. It has been made much more so by another technological development – that
of person-to-person or P2P networking. Sean Fanning, an 18-year-old student with the
nickname ‘the Napster’, was intrigued by the challenge of being able to enable his friends
to ‘see’ and share between their own personal record collections. He argued that if they
held these in MP3 format then it should be possible to set up some kind of central
exchange program which facilitated their sharing. The result – the Napster.com site –
offered sophisticated software which enabled P2P transactions. The Napster server did
not actually hold any music on its files – but every day millions of swaps were made by
people around the world exchanging their music collections. Needless to say this posed a
huge threat to the established music business since it involved no payment of royalties. A
number of high-profile lawsuits followed but whilst Napster’s activities have been curbed
the problem did not go away. There are now many other sites emulating and extending
what Napster started – sites such as Gnutella, Kazaa, Limewire took the P2P idea further
and enabled exchange of many different file formats – text, video, etc. In Napster’s own
case the phenomenally successful site concluded a deal with entertainment giant
Bertelsman which paved the way for subscription-based services which provide some
revenue stream to deal with the royalty issue. Expectations that legal protection would
limit the impact of this revolution have been dampened by a US Court of Appeal ruling
which rejected claims that P2P violated copyright law. Their judgement said, ‘History has
shown that time and market forces often provide equilibrium in balancing interests,
whether the new technology be a player piano, a copier, a tape recorder, a video recorder,
a PC, a karaoke machine or an MP3 player’ (Personal Computer World, November 2004,
p. 32). Significantly the new opportunities opened up by this were seized not by music
industry firms but by computer companies, especially Apple. In parallel with the launch
of their successful iPod personal MP3 player they opened a site called iTunes which
offered users a choice of thousands of tracks for download at 99c each. In its first weeks
of operation it recorded 1 million hits and in February 2006 the billionth song, ‘Speed of
Sound’, was purchased as part of Coldplay’s X&Y album by Alex Ostrovsky from West
Bloomfield, Michigan. ‘I hope that every customer, artist, and music company executive
takes a moment today to reflect on what we’ve achieved together during the past three
years,’ said Steve Jobs, Apple’s CEO. ‘Over 1 billion songs have now been legally
purchased and downloaded around the globe, representing a major force against music
piracy and the future of music distribution as we move from CDs to the Internet.’ This
has been a dramatic shift, reaching the point where more singles were bought as
downloads in 2005 than as CDs, and where the overall shift to a majority of purchases
being by download was expected to take place during 2006. New players are coming to
dominate the game – for example, Tesco and Microsoft. And the changes don’t stop
there. In February 2006 the Arctic Monkeys topped the UK album charts and walked off
with a fistful of awards from the music business – yet their rise to prominence had been
entirely via ‘viral marketing’ across the Internet rather than by conventional advertising
and promotion. Playing gigs around the northern English town of Sheffield, the band
simply gave away CDs of their early songs to their fans, who then obligingly spread them
around on the Internet. ‘They came to the attention of the public via the Internet, and you
had chatrooms, everyone talking about them,’ said a slightly worried Gennaro Castaldo
of HMV Records. David Sinclair, a rock journalist suggested that ‘It’s a big wakeup call
to all the record companies, the establishment, if you like …. This lot caught them all
napping … We are living in a completely different era, which the Arctic Monkeys have
done an awful lot to bring about.’ The writing may be on the wall for the music industry
in the same way as the low-cost airline business has transformed the travel business. And
behind the music business the next target may be the movie and entertainment industry
where there are already worrying similarities; or the growing computer games sector,
with shifts towards more small-scale developers emulating the Arctic Monkeys and using
viral marketing to build a sales base.
1. In this chapter we looked at the idea that innovations can be ‘architectural’ – changes
in the ways different things are put together into a whole system. Examples might be a
motor car, a mobile phone business, a hospital. And innovations can also be at the
‘component’ level – the parts which go into those systems – for example, the engine,
brakes, fuel tank, electrics, etc. which go into a car. Changes at the component level may
take place independently but when the whole architecture changes there are often major
winners and losers. Looking at the case study, try to identify which of the changes are
architectural and which are component. What are the implications for different players in
terms of the likely threat to them and the ways in which they could respond?
2.Competence destroying and competence enhancing innovation
Try to review the case in terms of the following questions.
•
•To what extent do the changes involve competence-enhancing (i.e. building on what
a player in the industry already knows so they can strengthen their position) or
competence-destroying (i.e. something completely new which requires learning some
new tricks) innovations?
•
•And for whom? (Think about the different players in the music industry – who are
the likely winners and losers.)
•
•What strategies might a firm use to exploit the opportunities? (Again think about the
different players in the industry and how they might defend their positions or open up
new opportunities.)
3.Can you map the different kinds of innovation in the case study? Which were
incremental and which radical/discontinuous? Why? Give examples to support your
answer.
4.Strategic advantage in innovation can come through combinations of four basic types of
innovation – product/offering, process, position and paradigm (mental model). (Look
at page 19 to remind yourself about this.) Giving examples to illustrate your answer, how
has the pattern of strategic advantage changed in the music industry?
5. Is the ‘revolution’ in the music industry a result of the development of new
technologies? Or is it happening because of changes on the demand side – shifts in what
people want and are prepared to pay for? Or is it a mixture of both? What lessons might
that offer to someone wanting to enter the industry as a new player? And what might an
established player do to preserve their position? Illustrate your answer with examples.
Is the ‘revolution’ in the music industry a result of the development of new technologies?
Or is it happening because of changes on the demand side – shifts in what people want
and are prepared to pay for? Or is it a mixture of both? What lessons might that offer to
someone wanting to enter the industry as a new player? And what might an established
player do to preserve their position? Illustrate your answer with examples.
…
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