Customer involvement in service innovation- a study of the bank industry

Customer involvement in service innovation- a study of the bank industry
Customer involvement
        in service innovation–
      a study of the bank industry
Authors: Jimmie Borgqvist,                        Tutor: Sarah Philipsson
         Master Programme Marketing
                                                 Subject: Service Innovation
        Daniel Lindberg,
        Master Programme Marketing    Level and semester: Advanced level, Spring
                                                          2011
Acknowledgement
The area of customer involvement in the development of services in the bank industry has
been an interesting subject to study. We would not have come this far without the help of a
few people. We will start off by thanking our tutor Sarah Philipson, who has helped us with
ideas and guided us throughout our thesis. We will also like to thank Marcus Wideroth, Peter
Svensson and Per Kristensson for taking part in our pre study, they gave us information about
the industry, which helped us get valuable insights of how the services are developed today
and possible future development. At last we would like to thank those 300 respondents that
participated in our survey, their contribution made this research possible.




                                      Växjö 2011-05-27


                  Daniel Lindberg                          Jimmie Borgqvist
Abstract
Thesis; Master Programme, Marketing
Linnæus University, School of Business and Economics in Växjö
Authors: Jimmie Borgqvist & Daniel Lindberg
Tutor: Sarah Philipson
Title: Customer involvement in Service Innovation – a study of the banking industry.

Background/Problem: Services are commodities in most service industries and the
companies are not putting enough into innovation of services to differentiate themselves from
their competitors. Since the services are commodities it does not make the customers
committed to a certain company nor does it make the customer chose the best service, since
they are so much alike. To be able to adapt the services to the customers the companies need
to know what the customers want. This research is proposing that the way to find out what the
customers want is through customer involvement in the service innovation process.

Purpose: The purpose of this thesis is to identify opportunities for service companies to
involve customers in the service innovation process.

Theory: The theoretical framework is built up out of the concept of customer involvement in
service innovation, which is a research area that has been put aside for customer involvement
for product innovation. Despite this the area has some interesting articles and this research is
built up around Alam’s (2002) model of customer involvement.

Research question: What preferences do customers have when interacting in service
development and what kind of involvement is best suited for their needs?

Method: The empirical study of the research was performed through a pre-study with semi-
structured telephone interviews and the actual study consisted of internet surveys. The
telephone interviews were conducted with three experts in the area of customer involvement
in service innovation and the banking industry. The surveys had 300 responses within the
sample of the study. The sample consisted of Swedish bank customers in the ages of 18 to 25.

Conclusion: Customers wants communication methods which are not involving face-to-face
interaction. Instead they prefer mobile applications, social networks and the internet bank.
Customers prefer to innovate together with other customers and employees of the bank.
Table of content
1. Introduction ............................................................................................................................ 1

   1.1 Background ...................................................................................................................... 2

   1.2 Problem discussion........................................................................................................... 2

   1.3 Purpose ............................................................................................................................. 3

2. Theoretical Framework .......................................................................................................... 4

   2.1 New service development vs. new product development ................................................ 4

   2.2 Key factors of user involvement ...................................................................................... 5

   2.3 Overall view of the theory.............................................................................................. 14

   2.4 Theory discussion........................................................................................................... 15

   2.5 Theoretical Model .......................................................................................................... 16

   2.6 State of the art ................................................................................................................ 17

   2.7 Research Question.......................................................................................................... 17

3. Methodology ........................................................................................................................ 18

   3.1 Research design.............................................................................................................. 18

   3.2 Population/Sample ......................................................................................................... 20

   3.3 Operationalization .......................................................................................................... 22

   3.4 Validity........................................................................................................................... 25

   3.5 Reliability ....................................................................................................................... 25

4. Empirical data ...................................................................................................................... 27

   4.1 Pre-study......................................................................................................................... 27

   4.2 Cross tabulations ............................................................................................................ 28

   4.3 Descriptive statistics....................................................................................................... 32

   4.4 Regression analyzes ....................................................................................................... 33

5. Analysis................................................................................................................................ 40

   5.1 Purpose/objective of involvement.................................................................................. 40

   5.2 Stages of involvement .................................................................................................... 41
5.3 Intensity of involvement................................................................................................. 43

   5.4 Modes of involvement.................................................................................................... 44

6. Conclusion............................................................................................................................ 48

7. Reflections............................................................................................................................ 49

8. Further research.................................................................................................................... 49

9. References ............................................................................................................................ 50

Appendix 1. Coding model ...................................................................................................... 54

Appendix 2. Interview guideline pre-study: semi-structured interviews ................................. 56

Appendix 3. Crosstabulations .................................................................................................. 57

Appendix 4. Deskriptive statistics............................................................................................ 66

Appendix 5. Frequency Table .................................................................................................. 69
1. Introduction
This chapter explains the introduction of the paper. It starts off with an introduction to the
research area, continues with the background of the research and the problem discussion and
it ends with the purpose of the paper.


The service sector in developing countries has become the most important factor in national
economics. The sector is currently providing a larger turnover than the industrial sector, e.g.
70 percent of the gross margin in Organization for Economic Co-operation and Development
(OECD) countries. In European countries two thirds of the working force is employed in the
service sector and the contribution to economic growth is the highest of all sectors (Jiménez-
Zarco et al, 2011). Most of the countries with a high income today are post industrialized,
meaning that they are becoming less reliant on industry and more reliant towards services.
This development brings with it less demand for natural capital and more for human capital,
which results in a higher demand for educated workers and less pressure on the countries
national resources and the global environment (www.worldbank.org, 2009).

The number of service businesses is not the only thing that has changed over the years. The
services process it selves has changed, especially since computers and internet made its
entrance into service firms. The consequences of this new technology were that many service
firms lost their face-to-face interaction with their customers. In early days service companies
had a close relationship with their customers; personnel knew their customers individually
and knew exactly how to satisfy their needs, which created loyal customers. However as soon
as mass marketing and buying behavior were on the rise a close relationship was not as
important for the customers as a low price. This resulted in the reducing of variety in service
offerings (Pepperd, 2000). Nowadays companies have learned to take advantage of the new
technology and to communicate with its customers, enabling companies to offer both low
prices and a variety of personalized services. Presently these information and communication
technologies have made it possible for the service sector to obtain and store knowledge about
customers, making it easier to satisfy their needs and to develop new services according to
their preferences (Chesbrough & Spohre 2006).




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1.1 Background
Innovation in Service companies is a very important activity, but until recent times there were
not much innovation activities going on in service companies (Jiménez-Zarco et al, 2011). In
this paper the concepts innovation and service development are not separated as well as
customers and users are used interchangeably throughout the paper, meaning the same people.
The innovation activity is very hard to measure and to recognize. The main reasons for this
are the intangibility of services making it difficult to know the exact performance of a service
and its special characteristics. Other reasons are that it cannot be stored in warehouses for
later use making the interaction between the service and its users constant and highly
influential (Jiménez-Zarco et al, 2011). User innovation was introduced by von Hippel
(1986); his concept was based on that the end user were responsible for a large part of new
product and service innovations.

Matthing et al (2004 pp. 487) defines the process of customer involvement as following:
“Customer involvement is the processes, deeds and interactions where a service provider
collaborates with current (or potential) customers to learn about the market and alter
organizational behavior”. Magnusson et al. (2003) state that; for service companies, to be
competitive in a market the single most important factor is a successful development of
innovative services. They continue by stating that it is crucial that these services are in line
with customer’s value preferences and their needs and wants. Because of the availability of
today’s technology and the continuously increasing demand from customers, services are
getting closer to commodities. A commodity market is offering very standardized
products/services and in these markets is it hard to achieve competitive advantage (Knutsson
et al 2011).

1.2 Problem discussion
According to Levesque & Macdougall, (1996) Service companies has a problem with
differentiating their offerings in commodity markets, services are highly imitable which
competitors are taking advantage of. This has lead to that many companies are focusing their
strategy on customer satisfaction, loyalty and the quality of the services instead of innovating
new ones, which have made the services offered in the industry very standardized. The
standardization of the services has made the companies vulnerable to any changes in their
business landscape (Levesque & Macdougall, 1996).




                                                                                              2
In general there are no special departments in service firms which are focusing on innovation
of services; service innovation is something that happens frequently in the service delivery
process. The sources of innovation steams from the companies’ strategies of satisfying their
current customers and keeping them loyal, but also from commerce activities and market
demand (Chen & Lu, 2007). Traditionally the service provider has been the most logical
innovator, services has been developed for the customer instead of with the customer. The
reason for this lies in the financial incentives and that knowledge and capability to get a
diffusion of the innovation is perceived higher for manufacturer than user innovators (Von
Hippel 2001). Despite this von Hippel (2001) argues that studies have shown that user-lead
innovations can compete with commercial manufacturer’s innovation. He continues by
claiming that the conditions are that there have to be an interest from the companies to
embrace the customers’ knowledge and customers being willing to share their experiences
freely.

Customer’s behavior, competence and attitude all have an effect on the innovation,
throughout the whole process. As they interact they are customizing the offerings, making
every step of the innovation process important for service innovators (Chen & Lu, 2007). The
Information the users involved is sharing is not up to date for all eternity. Behavior, attitudes
and habits of customers changes over time, which results in that if companies want to engage
their customers the companies have to be through a process of several engagements over time
(Von Hippel, 2001). The problem for service industry companies is how they could involve
customers in the innovation process not only for the reason of increasing the loyalty or
satisfaction but also to become differentiated from other companies and to be more attractive.

1.3 Purpose
The purpose of this thesis is to identify opportunities for service companies to involve
customers in the service innovation process.




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2. Theoretical Framework
This chapter explains the theoretical framework of the research. It starts off with a
description of the differences between new service development and new product
development. Then it proceeds with the key factors of user involvement in innovation, a
theoretical overview and ends with a theory discussion a theoretical model, state of the art
and the research question of the paper.

2.1 New service development vs. new product development
New service development, NSD, do not have a long history. Innovation has mostly been
associated with tangible products, making NSD a fairly unexplored area. Whether to
distinguish NSD from new product development, NPD, or not is something that is crucial to
discuss and many argue that the literature of NPD does not cover the complexity, intangibility
and heterogeneity of NSD (Alam & Perry, 2002). One major difference seems to be the
importance and involvement of the customer in the processes. The role of the customer’s is
more important in NSD. Therefore the usage of NPD models in NSD is debatable (Matthing
et al. 2004). The involvement of customers in services involves a longer and more intimate
relationship, not only through a purchase but through the whole consumption process, making
the user’s knowledge and experiences more important for service companies than tangible
product companies. This creates major challenges for Service companies because new
services must be more responsive to customers’ needs (Alam & Perry, 2002).

To get the customer involved is by itself not an easy task. Nambisian (2002) stress the
difficulty in identifying appropriate customers and giving them the right incentive for their
participation and sharing their knowledge. Magnusson, et al (2003) claims through his
research that past literature about NPD cannot be transferred and used in a NSD context,
because of major differences between NPD and NSD. Therefore user involvement in NSD
needs to be clearly defined. Further on he states that the definition and model of Alam (2002)
is a good start for the research of the area.




                                                                                            4
2.2 Key factors of user involvement
The theoretical research in the area of customer involvement is mostly focused on product
development and innovation rather than the development of services (Alam, 2002). However,
Alam developed a framework that contained four different key factors for describing different
sorts of user involvement (Magnusson, 2003).

Alam’s (2002) key factors are:
   -   Purpose/ objective of customer involvement.
   -   Stages of involvement.
   -   Intensity of involvement.
   -   Modes of involvement.

The first key factor, which is the purpose/objective of the customer involvement, refers to
why the company should involve the customers in their service innovation. The objectives
could be to improve the relationships with the users, reduce the innovation time or to gain
new ideas from the customers. He continues by stating that the second key factor, which is the
stages of involvement, highlights where in the process of the service innovation the customers
are involved. The third key factor of customer involvement, which is the intensity of the
customer involvement, of course refers to how involved the customers are in the innovation
process. The fourth and final factor of the customer involvement is the modes in which they
are involved. The modes could for example be focus groups, face-to-face interviews,
brainstorming etcetera (Alam 2002).

The four key factors described above have set the structure of the theoretical framework of
this research. The factors are used as headings and are also the main parts from which the
theories are discussed.

Factor one: the purpose/objective of customer involvement
To be able to innovate new services there are two main issues; the service companies need to
know how to innovate but also what to innovate. Therefore it would be a major advantage for
the company if they knew what the customers really need. With the help of that knowledge
the company could develop a suitable method of developing the ideas (Lundqvist & Yakhlef,
2004). The companies could use the customers in this process, not only for creating new ideas
for services but also in the rest of the innovating process. The customers could help with the
creation, the testing of the product as well as offering support to the end users (Nambisian,



                                                                                            5
2002). One of the main reasons for involving customers is to get hold of information about the
user’s latent needs (Matthing et al, 2004).

The latent needs are the values of the service or what they truly need but they have not
realized it themselves and have therefore not experienced it or requested it (Senge, 1990).
Since they do not request these services the companies and the developers within them cannot
get access to that information (Matthing et al 2004). Von Hippel (1994) argue that the
knowledge of user needs is tacit, which makes it difficult to transfer the knowledge from the
customers to another actor. Therefore, the users have exclusive access to the knowledge in
question. This could explain why it was users who developed the radical new ideas and not
the manufacturers in a study performed by Lettl (2007). Moreover, it is not sufficient enough
to simply ask the customers for ideas; they have to be further involved (Magnusson et al,
2003). Therefore, if the service companies have an active strategy, which contributes to the
involvement of customers early and intensively; they are gaining a greater knowledge about
the customers and reduce the risk of being imitated by other companies by being on the
cutting edge of their business area (Alam & Perry, 2002).

Ulwick (2002) state that the customers only have opinions on what they have experienced and
cannot reflect on the using of emerging technologies. Furthermore, Prahalad & Ramaswamy
(2000) argue that the customer’s role in the service innovation process is to share their
knowledge, contribute with their skills and experiences but also to inform the company about
his or her frustrations, problems, requirements and expectations. Furthermore; they state that
the customers have to be ready to learn and experiment within the innovation process. Alam
(2002) states that because of the structural changes in the service sector; there is a need to
constantly create and develop new services which are suitable for the users in the industry.
Furthermore he argues that; those services have to reach the market at the right time and to
reach these objectives; the customer involvement is an important factor for the companies to
reflect upon.
Moreover, the collaboration between the users and suppliers could be beneficial for the
company, because it can create a mutual understanding of the customer’s wishes and needs.
Furthermore, it could create an understanding of the technological opportunities for the two
actors. (Sinkula, 1994) Magnusson et al. (2003) agree with this stating that the ideas of the
involved customers can be used for learning more about the customer and understanding their
needs better. Matthing et al (2004) state that in service innovation; customer involvement can,
if it is managed correctly, hold valuable information about the customers and it has a good

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effect on the innovativeness of the ideas. Furthermore, Alam and Perry (2002) state that
customer involvement could reinforce the public relations, which hopefully from the
companies’ point of view will increase the loyalty of the customers as well as; help the
company maintain their relationships with the users for a long time. Another advantage of
customer involvement is that the development cycle in some cases gets shortened if an
ongoing customer testing is used during the development (Gupta & Wilemon, 1990). Alam
(2006) and Alam & Perry (2002) also highlight the shortening of the development cycle,
which can results from customer involvement.

Wind & Mahajan (1997) argue that a shortened development cycle is not an advantage in all
cases because sometimes the companies develop products with low quality or just incremental
innovations if the development cycle is shorter. However Alam (2006) highlights that this
might just concern product development and not be applicable for service innovations. He
claims that if the companies collaborate with the customers in the front-end stages to create a
faster cycle in new service development the firms can become first-movers which are
developing pioneering innovations.

Sawhney & Prandelli (2000) argue that with the new technology it is time to change the
perspective to a view where the customer and the company create knowledge together instead
of the company merely exploiting the customer. Moreover, McQuarrie & McIntyre (1986)
argue that the users do not normally take part in the first phases of the creating of new
innovative ideas, because the companies do not trust them in that area. They continue by
stating that these phases are solely controlled by the professional designers of the company
and users are not involved before the testing and evaluation of those ideas, where the
customers are part of focus groups or some other form of testing. This despite that Magnusson
et al. (2003) argue that the user’s ideas are more original and user friendly than the designer’s.
The backside according to them is that the products are less producible. Furthermore, they
state that with the help of the customer’s ideas the professionals can create new services and
that the ideas also can be used as an inspiration for the designers.

Alam & Perry (2002) argues that other advantages with customer involvement is that it can
generate better and more differentiated services which are better suited for the customer’s
wants and needs. They also state that user involvement can help the company educate the
customers in using the new services as well as help the firm with the diffusion of the services,
which can make the new innovations gain acceptance in the market faster. Furthermore, there



                                                                                                7
are different objectives of the customer involvement depending on which types of innovations
the companies want to create (Lettl, 2007).

Factor two: the stages of innovation
Alam (2002) has derived 10 different stages where users are involved in NSD: (1) strategic
planning, (2) idea generation, (3) idea screening, (4) business analysis, (5) formation of the
functional team, (6) service and process design, (7) personnel training, (8) service testing and
service run, (9) test marketing and (10) commercialization. Lettl (2007) stresses that to
develop radical innovations a service company is dependent on technological and market
related capabilities. One of the most important capabilities, which the companies can gain
from the market, is the ability to involve the right users at the right time in the right form. The
key factor is to identify which users that can contribute in which stages of the innovation
process. Thereafter be able to establish a systematical way of finding and communicate with
them in an effective way. Alam (2002) stresses although all steps are contributing for the
development, the three first steps are more important when it comes to user input, this because
the large number of new service ideas that needs to be generated. Further on user input in
service and process design is also important because the development of differentiated and
unique services. Alam & Perry (2002) adds that a constant flow of new service ideas are
necessary to be successful, therefore the user should be involved in the innovation process as
early as possible.

Alam (2006) describes that the first stages of the innovation process are in some contexts
called the fuzzy front end of the process. The fuzziness comes from the imprecise and
pragmatic decision processes that come into action in service innovation. These stages are
important because they are the most information intensive and obtain the largest potential for
possibilities of improvement. User involvement in the early stages are significantly
influencing the performance of the service, the inseparability nature of services makes it even
more important to involve users, this if the service is aimed to be differentiated from the rival
companies’ services (Alam, 2006).

Magnusson et al (2003) focused his research on the idea generation stage and how users
could come up with new service innovation ideas. The result showed that if users in this stage
got a consultancy from a professional about underlying technology behind a service the ideas
were more realistic and easier to commercialize, than if the users where unfamiliar with the
capability of the technology, however this consultancy did have a negative effect on the
originality of the users ideas. Customer’s knowledge can not only be implemented in the start
                                                                                                 8
of an innovation process. Nambisian (2002) stress their importance in co-creating innovations
in the later stages, e.g. testing services and providing end support. He continues expressing
the user’s role in testing and giving support to new services. One successful case of involving
users in the later stages comes from the software industry were the use of beta services
reduces the risks and investments for companies. If the users are capable of identifying
unappreciated features or features of interest which not are applied, companies can reduce
development costs and by involving different set of users a better understanding about
different kinds of needs can be acquired (Nambisian 2002). Later research in the area goes
more deeply into the user’s exposure to new service innovations. Zolfagharian & Paswan
(2010) states that a user which is exposed to a new service goes through a number of stages:
(1) perceptual and evaluative processes for goal setting, (2) emotional acceptance and
resistance, (3) coping responses and (4) adopting decision. The first stage gives indices to
how much service attributes are different from a competing service and how they are
compared. While the other stages deal with to what degree the user has control over the new
process and how the users learn to adapt to new features (Zolfagharian & Paswan, 2010).
Alam (2006) states that to get the most accurate information, specific goals for the interaction
needs to be set for each stage of the innovation process. Aiming to wide with user
involvement will only lead to a fumbling in the dark for answers, user involvement should be
dealt with the simplest way possible and solve specific problems.

Factor three: the intensity of involvement
To what extent and how much influence users should have in the innovation process is a
contradictory matter. Lundqvist & Yakhlef (2004) stresses that service companies should try
to involve their users into the process as fully legitimate actors, both when it comes to
defining the meaning of services and the development of new ideas. Some authors agree with
this need of a high intensity of user involvement. Nambisian (2002) says that firms, to get
most out of the user’s competence, need to involve them to that extent that they are
considered employees. They need to be brought inside the organization and be granted a
recognized voice to achieve the largest effect. Nambisian (2002) continues with saying that
this process of interaction between the company and the customer also means a
transformation of the user to a collective actor. Lettl (2007) states that early research on the
intensity of involvement showed that users had a passive role in the innovation process,
because of this Lettl (2007) focused his research on how suitable users can have a more active
part in the process. He continues by explaining that both active and passive users can be


                                                                                              9
problematic to handle, especially to identify these and to know if they are capable in
contributing in a creative and innovative way. Further on he discussed on what interaction
level a firm needs to engage the target user. This depends on the purpose of the interaction but
for new innovations a face-to-face meeting with the user is the best alternative.

Matthing et al. (2004) discuss the customer interactions and defines an active customer as one
who in one way or another interacts with service personnel, the service script and supporting
tangibles. He continues by saying that the interaction is the centre of a market oriented
strategy, making the relationship with the customer highly important. Nambisian (2002) states
that interaction with customers can be costly and time consuming, therefore is it important
that the interaction is overviewed and governed. The benefits of which a company gains from
the interaction must outweigh the cost of man hour and support put in by the service firm.
Matthing et al. (2004) stresses that if service innovation is to be better over time, with help of
customers, a relationship must first be established. This will reduce costs and make it easier to
attract the customers of interest in developing the services. Creating this relationship with
customers are somewhat in line with Lundkvist & Yakhlef (2004) thoughts of involving
customers as fully legitimate actors, a coherent believe among these seems to be that the
intensity of customer involvement needs to be frequent and integrated within the companies’
“walls” to get the best and as much information from the customers as possible.

Alam (2006) also discusses the issue of relationship with users. He adds that interacting with
a fairly new user could create a conflict of interests because of lack in mutual trust. However,
he presents a negative aspect to interacting with loyal customers that already has a
relationship with the firm. This group is motivated but seems unable to provide rich and
diverse information. Information about service innovation could be sensitive for service
companies. Therefore, companies prefer working with customers they know to not risk that
new development information will reach to competitors. Alam (2006) continues by stating
that the major problems are identifying appropriate users and the lack of commitment and
cooperation among these users. Many customers are expecting something tangible in return
when giving ideas or taking part in surveys, therefore if there is no incitement they might not
commit to fully to the assignment. Moreover, he is stressing the risk of involving the
customers too much, which can result in too customized services. The best way is to focus on
a few ideas and development projects and involving the users in the different stages.




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Factor four: the modes of involvement
Nambisian (2002) states that; firms are dealing with three big challenges when using customer
involvement in innovation. The three different challenges consist of the problems to find
appropriate customers to involve, finding the right incentives to make the customers willing to
contribute and finally to capture the knowledge of the customer. It is the third and final
challenge which deals with the modes of involvement. Lettl (2007) states that; it is important
for the companies to find the right forms, in which to involve the customers. Modes of
involvement deals with; how the companies can gain information and knowledge from the
customers. There are several ways of doing this i.e. brainstorming, focus groups and face-to-
face interviews, where face-to-face interaction is considered having several positive effects
compared to non-interaction. (Magnusson et al., 2003) Furthermore Alam (2002) identifies
user visits and meetings, user’s observation and feedback, phone communication and email
communication as other ways to perform customer involvement in the innovation process.

Of course the modes of involvement are affected by the level of intensity the involvement has,
i.e. a survey is one sort of low intensity mode while co-creation is much higher in intensity.
Sinkula (1994) argue that collaboration between users and suppliers could lead to a mutual
understanding of the needs of the users. Therefore a mode with higher involvement might be
more appropriate, than for example just handing out surveys. The low intensity modes should
not be considered useless though, since Magnusson et al. (2003) regard the ideas of the users
as a source of inspiration for the company and the ideas could be a fresh injection in the
companies’ creative veins. However, Prahalad & Ramaswamy (2000) claims that users have
the possibility to be involved during the development continually, by coming up with
suggestions.

Another view of what is the best mode is Andreassen & Streukens’ (2009), which believe in
the listening of online discussions as a form of involving the customers. The mode might not
seem to be a traditional way of looking at customer involvement but they state that by having
a proactive approach to the online discussions the customer’s ideas are involved in the
innovation process and give the companies a substantial amount of feedback. Prahalad &
Ramaswamy (2000) agrees with this to some extent by stating that the customer should be
observed in their own environment more often; making interviews a less appropriate
alternative. The online listening might not be an observation but the discussions are generated
by experiences the customers have in their own environment. Matthing et al (2004) also state
that the involvement of the customers should be in a form where the customers are generating

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ideas in their own environment. They propose that this should be done by letting the
customers invent themselves and thereby discover the customer’s latent needs. However, they
realize that that mode of involvement could interfere with the current company structure.
Lundqvist & Yakhlef (2004) state that if the companies want to involve the customers in their
organization they have to look at them as fully legitimate actors, which can be actively
involved in the innovation of new services and come up with changes to the innovations.
Nambisian (2002) agree with this when stating that if the companies want to involve the
customers; they have to make them part of the development team or even see them as
employees’ of the company. Slater & Olson (2001) states that market-oriented companies
does not involve the customers enough and that they often are satisfied by using verbal
techniques for gathering customer knowledge such as surveys or focus groups instead of
making them an integral part of the development process. Matthing et al (2004) argues the
development of a cross-functional development process, which includes engineers, marketers,
behaviorists and the involved customers instead of just engineers.

Lettl (2007) states that to find the right mode of involvement the companies have to consider
how many users they should involve in the innovation process and not solely focus on the
level of interaction with the customers. Another factor the companies have to consider is what
time frame is appropriate for the customer involvement. Regarding the choice of mode of
involvement Mathing & Sanden (2004) states that the result of their study, which made the
customers innovate in their own environment, could never been achieved by an interview.
Von Hippel (1994) agrees with this by stating that a deeper understanding of user needs is
tacit, which makes it very difficult to transfer to other actors. Lettl (2007) believes that this
might be the reason why users are developing much more radical ideas than the
manufacturing companies. Magnusson et al. (2003) argues that to come up with new
innovations it is not enough to merely ask the customers for ideas, because in that case they
would most likely just come up with ideas that are already known to the companies. He
believes in going one step further and to involve them more in the process.

As an extension to this idea Nambisian (2002) believes that customers could be a part of not
just the idea generation process but in co-creating the innovations with the companies, testing
the innovations and finally providing support for the end user. With the help of tool kits it
would be easier to get help from the users in the innovating process. Tool kits for user
innovation are an alternative, which is emerging. This idea means that the manufacturers do
not need to have a deep understanding of the user needs to be able to produce services which

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are satisfying the user’s needs, because the users are coming up with the innovations
themselves. The objective of the tool kits is to make the users handle the need-related
innovation tasks, since they are more familiar with their needs and then let the companies deal
with the solution-related innovation tasks, since the manufacturer are more familiar with how
to solve and manufacture the innovation. (Von Hippel & Katz, 2002)

Von Hippel & Katz (2002) state that; the tool kit approach is complementary to the lead user
approach, where the companies are trying to find the customers who buy the cutting edge
services or products and get information about their needs. Alam (2006) argue that the lead
user approach assumes that the average user has a hard time judging or coming up with new
innovations since they are so far away from them in their real life. One question remains in
the approach of letting customers create new innovations. Magnusson et al. (2003) face this
dilemma in their study; should the companies give the customers any consultation in their
process? The study shows that users created more original ideas themselves, while the ideas
became more producible with the help of consultation. However the theories, of the most
effective way to involve the customers, differ and Alam (2002) states that interviews and
meetings with the customers are the most dominate ways of doing this, while phone and mail
communication and focus groups are the least used. Furthermore, he states that the different
methods can be used in different stages of the innovation process.




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2.3 Overall view of the theory




Fig.1 Theory overview




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2.4 Theory discussion
The theories suggest many purposes, modes, stages and the intensity of user involvement in
service innovation. Studies have been made on solutions best suited for the companies’ needs
and goals, not mentioning the needs and preferences that users have on when and how this
interaction should take place. Since the theories are positive about the advantages of user
involvement, we see no reason not to involve them and let them have an opinion in what way
they are most comfortable and effective in supporting the company. Theories are describing
difficulties in the user involvement; identifying the right consumers to take part in different
activities and overcoming a lack of commitment (Alam 2006). Alam (2006) also says that
lack of trust can result in conflicts between the user and the company. Nambisian (2002) adds
that the process of involving the user can be costly and time consuming. This reveals a
problematic area which could be understood better if the needs of the consumers are revealed.
The following model explains the connections between the different areas of the customer
involvement in service innovation, this to explain how they interact and are affected by each
other.




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2.5 Theoretical Model




Fig. 2 Theoretical connections, based on Alam (2002)


   1. If the customer involvement has no purpose there it is meaningless to involve them.
      The purpose has to be clearly defined to not lose track of why they are involving the
      customers.

   2. The intensity is influenced by the purpose of the involvement. If the purpose is hard to
      achieve by just asking them questions, perhaps they need to be involved more.

   3. The intensity does influence the mode of involvement to choose; companies can
      choose highly or less intense involvement.

   4. The purpose of the involvement also affects what stages of the service innovation
      process the customers should be involved in. The purpose might just concern some of
      the stages.

   5. The intensity of involvement can affect the stages in which the customers are involved
      in, since some stages might require a more active involvement than others.

   6. The stages of involvement partly determine the mode of involvement the companies
      should choose, since some modes might be better in some stages.

   7. The modes of involvement are affected by the purpose of the involvement. The mode
      must be suitable for reaching the purpose of the involvement.




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2.6 State of the art
The theory covers the area of user involvement in service innovation. This area is fairly new
and as far as our literature review extended, we conclude that no theories that only deal with
user involvement in service innovation have been validated to the extent that it could be called
dominant. Alam (2002) did however set a new tone with the study over user input in different
stages of service innovation excluding any theory from product innovation. Alam (2006)
continued in the same line, but focused on the first stages of the innovation process, although
none of these can be considered empirically validated.

Magnusson (2003) and Magnusson et al (2003) enhanced the understanding of the quality of
ideas generated by users in focus groups, in comparison to professional developers or if they
received help from professionals. This was also studied by Matthing et al (2004), whom
confirmed that user’s ideas are more innovative in terms of originality and user value than
professionals. Lettl (2007) confirmed what all the previous studies had stated, the fact that
user involvement will have a positive effect on service innovation in some way or another,
however what Lettl (2007) did different was that he distinguished active and passive users.
None of the theories of user involvement in service innovation is empirically validated. We
found no research about customer preferences regarding user involvement; therefore we
consider it to be a gap.

2.7 Research Question
What preferences do customers have when interacting in service development and what kind
of involvement is best suited for their needs?




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3. Methodology
This chapter explains the methodology of the paper. It starts off with the research design of
the research, continues with the population/sample and operationalization. Finally, there is a
presentation of the study’s validity and reliability.

3.1 Research design
This is a qualitative research, which Bryman & Bell (2005) argue is often conducted to
generate new theories. They state that qualitative research finds answers to questions on how
and why something is performed in a certain way. The difference between quantitative and
qualitative research is that the quantitative method often focuses testing theories, looking for
correlations and collecting numerical data, rather than gaining a deeper understanding of a
subject. (Bryman & Bell, 2005) The qualitative method is more appropriate for this study,
since the research is focused on new opportunities rather than collecting numerical data about
the current situation.

Pre-study
The possibilities of collecting data in a qualitative research are many; however this research
uses semi-structured interviews for a pre-study, which was performed to determine different
possibilities that later was used in a customer survey. The preparation for the interviews was
the creation of an interview guide with the basic questions we were asking. However, a lot of
focus was on asking follow up questions to get as much valid information as possible.
Bryman & Bell (2005) state that the major advantage of semi-structured interviews is
flexibility; to have the opportunity to continually ask follow up questions and propose new
questions as the interview goes on depending on the answers from the respondent.
Furthermore, they highlight that two other kinds of interviewing techniques are available;
structured interviewing and unstructured interviewing.

However, since the objective of the interview was to find ideas to use when creating the
questions for the surveys as well as find answer alternatives for the closed questions, a semi-
structured interview technique was arguably the most appropriate of the three techniques. This
was based on the need of some kind of structure to keep the questions within the framework
of this study combined with the possibility for us to explore the respondents more innovative
and perhaps unexpected answers. The interviews were conducted over telephone, which of
course has some advantages, in the form of convenience, as well as disadvantages. The most



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significant disadvantage is however the lack of personal contact between the interviewer and
the respondent Bryman & Bell (2005).

Customer surveys
The actual study consisted of internets surveys. The surveys the customers answered consisted
solely of closed questions with alternatives. Bryman & Bell (2005) state that surveys are
similar to structured interviews, since the customer answers previously decided questions, but
with a minor difference. Since there is no interviewer in the case of the surveys it is really
important to formulate the questions so that they are easy to understand. Bryman & Bell
(2005) state that the advantages of surveys, compared to structured interviews, are that they
are cheaper than both face-to-face and telephone interviews. Surveys also provide the
possibility to get a lot of data in a short time, since surveys can be answered at the same time
and no appointments has to be made.

Bryman & Bell (2005) continue by claiming that the removal of the interviewer effect and
flexibility for the respondents to answer when they have the time is favorable for the research.
However, they consider the disadvantages with surveys to be that there is often a lower
response rate than in structured interviews, the interviewer cannot help the respondent
interpret the questions, the interviewer cannot ask follow up questions and the researchers
cannot control in which order the customers answers the questions. To receive as relevant
answers from this survey as possible the authors first performed a pre-study. Then the
questions were carefully formulated, to avoid misunderstandings. The authors realize that the
response rate of the surveys might be lower than for example an interview, but the aim was to
push people as much as possible to get them to answer the questions. The main reason why a
survey was chosen was to collect a lot of data in a short period of time.

The survey was performed on the Internet, where the authors created a survey and sent a link
to it to the respondents. Honakker & Carayon (2009) state that the advantages of internet
surveys are that it is easy to reach a large population in a fast manner. This is done at a
reduced cost. They continue by stating that; all of these advantages are generated since the
time it takes to send out the link to the survey or to send out the questions via e-mail is very
short, the e-mails are free to send out and they are delivered immediately. There is also a
reduced error in data entry, which stems from the fact that the information is not put in
manually. It is not possible to answer the internet survey wrong since it is created so that it
cannot be sent in if it is not correctly filled out. This also heightens the quality of the answers.
Another advantage according to Honakker & Carayon (2009) is that the Internet surveys are

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more flexible and easier to administrate, which depends on that the surveys are just
formulated and then sent out, the surveys can be filled out where or when the respondent
wants, as long as there is an internet connection available. However, Honakker & Carayon
(2009) also state that there are some disadvantages; there might be a coverage error or a
sampling error, since everyone is not an internet user. However, this research assumes that the
internet usage of our segment is very high, making this problem a lot smaller. Honakker &
Carayon (2009) states that; a sampling error might occur since only a part of the population is
surveyed although the objective is to generalize the answers to the population. In the case of
this study, finding email addresses to such a large population is a challenge. They claim that
there is large risk of the surveys not getting answered, with this approach. As well as there are
problems with computer security and non-deliverability according to them. This is faced in
this research since some of the email addresses receiving the link to the survey might not be
valid anymore or might be perceived by the user as some sort of spam or virus.

The questions used in the study was theoretically grounded according to the
operationalization chapter, further on, as well as influenced by the pre study conducted with
experts of service innovation and the financial sector. The given answers for the closed
questions were also created through a combination of the information from the theoretical
framework and the empirical pre-study.

3.2 Population/Sample

Pre study
For the interviews the authors contacted people working in the financial sector which are
familiar with service innovation in the bank industry, but also those who are familiar with
customer involved service innovation in general. The selection of these people was done
through an online research of suitable candidates. The criteria were as stated above that they
had knowledge of one of those two areas or both. The online research made sure they met the
criteria. The authors then contacted the selected candidates to arrange a telephone interview.
The results of the selection of candidates were that we got three interviews. Initially five
experts were contacted and three of them had the opportunity to help this research at the time
given.




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The respondents were;
   -   Marcus Wideroth, Vice President of Business Development at Visab Consulting.
       He is a Management Consultant. Moreover, he has had several statements about the
       financial market published in newspapers. The company at which he is employed,
       Visab Consulting AB, is a consulting firm within business change management,
       information management and business solutions.


   -   Peter Svensson, PhD and Programme Manager of the financial market research
       programme at Vinnova, the Swedish governmental agency for innovation systems.


   -   Per Kristensson, PhD and Associate Professor at Karlstad University. He is currently
       conducting his studies on the development of technological services from a
       psychological perspective. One of the special areas of the research on Karlstad
       University is Service quality.

The authors thought that the titles and accomplishments these people have made them suitable
respondents in our pre-study.

Customer survey
Melzer (2010) states that; in a historical perspective Swedish people rarely change banks, but
as the situation is now more than 50 percent of the people are willing to change banks. The
reason for this is according to him the bad interest rates, lacking in service, high fees and the
unjustified bonuses claimed by the management of the banks. This makes the bank industry
very interesting at the moment. However, Askåker (2006) is arguing that the willingness to
change bank does not coincide with the youth segment, since investigations show that the
youths do not make an active bank choice in a lot of the cases. For example one of these
investigations does according to her show that 49 percent of the customers between 19 and 25
years have the same bank as their parents. Therefore, the banks has to adjust their services to
attract the youth segment and the way this research is proposing the banks to do that is by
involving the customers in the innovation process. Furthermore, the involvement in the
process might itself strengthen the relationship between the customer and the bank. Therefore,
this study is conducted on Swedish bank customers in the ages between 18 and 25 with the
objective of finding out how the customers want the innovation process to be performed. This
segment is the population of the study.



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Since the population was so large and it was very hard to access email-addresses to such a
large group of people, the authors decided to use a convenience sample. Bryman & Bell
(2005) state that; a convenience sample most likely has a higher response rate than a random
sample. However, they also argue that it makes the study harder to generalize. The author’s
assumption is that close to everyone in Sweden has a bank and when looking at the statistics
of people between 18 and 25 at SCB’s (the Swedish Central Statistics Bureau) web page; this
research’s population is over 1 million people (SCB, 2010). Therefore, our sample was
chosen through the author’s selection of a number of people among our acquaintances. The
acquaintances were people in different ages and were living in different cities in Sweden.
These acquaintances were then asked to send the link to the internet survey to their email-
contacts within the segment. For those who did not answer we made sure two reminders were
sent out to their email-addresses at different occasions. The sample became 850 people, which
resulted in 300 responses from people, who were Swedish bank customers in different ages
within the segment.

3.3 Operationalization
This chapter explains the operationalization of the empirical study. The reflections are about
the questions used in the survey. The questions are theoretically grounded as shown in the
discussions of the different questions. The questions are presented in the order they were
asked in the survey. The first one was; how often do you have personal contact with your
bank? By asking this question we aimed to find out the frequency of which customers in the
segment have a personal interaction with the banks. We hoped to see if there was a correlation
with how willing they are to help with service innovation. There are possibly other factors
affected by the frequency of the personal interaction with the banks’ employees, such as how
they want to be involved in the innovation. If personal contact actually encourages customers
to help in the innovation process, it could work as a factor in finding what Nambisian (2002)
states as vital; finding the appropriate users to involve.

The second question was; which bank services do you use today? This second question was
asked to find out how many and what type of services the customers in the segment use.
There might be a correlation between using many or some specific services and the
willingness to help the banks with the innovation. As proposed in the discussion of the last
question this might help banks to choose the right customers to involve. Next, we asked the
question to what degree do you feel you are participating in your bank’s development of new
services?. Since our aim is to identify opportunities for service companies to involve

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