At the heart of the connected strategy is the connected relationship between customers and a firm. We find it helpful to think about four design dimensions of a connected customer relationship, which we will refer to as the four Rs of connected relationships. First, the information that flows from the customer to the firm allows either party to recognize a customer need. Once a need is recognized, the customer or firm identifies a product or service that would satisfy this need, leading to a request for a desired option. In turn, this triggers the firm to respond, creating a customized, low-friction customer experience. By interacting with customers frequently, a firm is able to repeat the interactions with its customers, allowing it to continually refine the cycle of recognize-request-respond and to convert episodic interactions into a true relationship with its customers.
To create connected customer relationships in a cost-efficient way, a firm needs to create a connected delivery model. The delivery model is the result of three key strategic decisions. First, the firm has to decide whom to connect with whom in its ecosystem. What connections need to be created between and among its suppliers, its customers, and itself? We call this the connection architecture. Second, the firm has to decide how money will flow through this architecture, allowing it to monetize the value that results from breaking the trade-off between customer happiness and efficiency: it has to design a revenue model. Lastly, the firm has to make a range of technological choices that facilitate all the elements of a connected strategy. It has to decide on its technology infrastructure.
This book is designed to help you both understand and create connected strategies for your own organization. We have structured the book into three parts. In part I, we show in detail how connected strategies allow you to break your existing trade-off between customer happiness and efficiency. Part II helps you understand how to build connected customer relationships. Finally, in part III, we describe how to build a connected delivery model. Each part concludes with a chapter we call a workshop. In these workshops, we offer exercises that have been tested and refined with executive education audiences. These workshops will help you assess your firm’s current activities and create your own connected strategy.
To provide you with a road map of what lies ahead, here is a brief preview.
Part I: The Rewards of Connected Strategies
In chapter 2, “Breaking the Trade-off between Superior Customer Experience and Lowering Costs,” we discuss several case studies that illustrate how connected strategies can overcome the trade-off between customer happiness and efficiency—a trade-off that is foundational to most traditional strategic planning frameworks. By tracking guests in a theme park, selling smart books, and taking care of patients’ health rather than thinking of them as appointment slots, a connected strategy creates value by breaking the existing trade-offs between the value that a customer receives and the cost that the firm incurs. The reward of a connected strategy is providing more value to the customer at a lower cost to the firm.
We explain how current innovations in the grocery retail sector, including meal-kit delivery services, augmented reality displays, and stores without checkout lines, are increasing both customer satisfaction and efficiencies.
Using a detailed case study of the ride-hailing industry, we then discuss how firms such as Uber and Lyft not only have improved the passenger experience compared with cab companies but are able to do this at much lower fulfillment costs. By connecting passengers with drivers, ride-hailing companies have created a market for driving services. Further, by allowing prices to vary depending on supply and demand, drivers are given an incentive to work when and where it is most valuable. Matching supply with demand in a dynamic world requires new forms of connectivity that extend well beyond a person jumping into the street to flag a cab or calling a grumpy dispatcher to send a taxi. Once that connectivity is put in place, resources can be used much more efficiently.
We finish the chapter by discussing how connected strategies can lead to competitive advantage and by reflecting on the importance of data privacy in the context of connected strategies.
Chapter 3, titled “Workshop 1: Using Connectivity to Provide Superior Customer Experiences at Lower Costs,” contains a series of worksheets that will start you on the process of creating a connected strategy for your organization.
Part II: Creating Connected Customer Relationships
In part II of the book, we analyze in depth how you can create a connected relationship with your customers—a relationship in which episodic interactions are replaced by frequent, low-friction, and customized interactions enabled by rich data exchange.
In chapter 4, “Recognize, Request, and Respond: Building Connected Customer Experiences,” we investigate the first three design dimensions of a connected relationship. The dimension of recognize encapsulates the information flow between the customer and firm that leads to the recognition of a customer need. We discuss various ways in which you can shape this information flow: this flow might be initiated by the customer, or it might be autonomous. Once the information reaches the firm, the firm needs to interpret and convert it (or help the customer to convert it) into a request for a desired option. Lastly, the firm needs to respond to this request and fulfill the desired option in a low-friction manner. This full interaction between customer and firm creates a connected customer experience. Through our research, we have identified four different types of connected customer experiences. These are:
Respond-to-desire
Curated offering
Coach behavior
Automatic execution
Let’s take a look at each, returning to our examples from the prologue. Amazon is a great case of what we call a respond-to-desire connected customer experience. Once the customer expresses a need, Amazon responds rapidly and conveniently. At Disney, a key function of the MagicBand is to create a respond-to-desire experience. When a customer wants to enter a ride, pay for a cheeseburger, or open her hotel room, a swipe with the MagicBand is all that is needed.
The McGraw-Hill textbook example illustrates curated offering. Having many interactions with each customer allows the firm to learn about the customer’s needs. With that knowledge and trust, the customer is no longer alone in finding solutions. Here, the firm and the customer look for solutions jointly. McGraw-Hill does not just help the student figure out the corporate valuation problem on page 247, but instead detects that the student is still struggling with net present value calculations and asks him to repeat the content on page 35.
Companies that create connected strategies often create more than one connected customer experience. Returning to our Disney example, it’s clear that the MagicBand does more than create a respond-to-desire experience. With the MagicBand, the customer can communicate a decision that she no longer wants to take a ride on Magic Mountain. Instead, she tells Disney (or Disney knows from past experience) that she wants to experience an action ride and a yummy meal in the next two hours. Disney then takes this information and creates a personalized itinerary. Moreover, Disney is even able to customize the experience of different rides. For instance, if a visitor has created an avatar in one of Disney’s video games, this avatar will appear on the “Wanted” poster that the visitor sees during the Pirates of the Caribbean ride.
We call the third type of connected customer experience coach behavior. Firms like Nike try to change the behavior of customers toward what is good, smart, or healthy. Nike does not force you to go running more often, but it can offer to help you achieve your fitness and health goals. Similarly, the virtual tutor in a smart textbook says, “Jeremy, you have not yet completed the assigned readings for this week,” just as a wearable device starts vibrating if its owner has not left his office chair for the last few hours.
Connected devices that let health care providers intervene even before an urgent need has arisen and implanted devices that are able to take independent actions are examples of the automatic execution connected customer experience. A ca
rdiologist is consulted the moment an arrhythmia is recorded by the heart-rate monitor. A digital photo album is created and sent to the customer based on many shots taken in the theme park, all done without the customer ever noticing a camera. As with many connected strategies, these deep connections can raise privacy issues, as they sit in a gray zone between Big Brother and parental love. We will explore these issues throughout the book. And, just to be clear, we don’t see this as the vision for all connected customer experiences, though most of our students would happily permit textbooks to take their exams for them …
While these individual customer experiences already create a lot of value, once a firm is able to repeat these interactions, it has the ability to substantially refine the customer experience over time. A firm with a connected strategy is able to transform a series of customer experiences into a connected relationship with its customers—a key condition for a firm to create a competitive advantage. This transformation is the topic of chapter 5, “Repeat: Building Customer Relationships to Create Competitive Advantage.”
We believe that many connected customer experiences will become table stakes in the future. That is why the repeat dimension is so important. It is through this dimension—the ability of firms to learn from existing interactions in order to shape future interactions—that firms will be able to create a sustainable competitive advantage. The repeat dimension helps firms with two forms of learning.
First, at the level of a particular customer, a firm learns how to better match the needs of this customer with the firm’s existing products and services. Disney learns that Jing seems to like ice cream more than fries and theater performances more than rides, so it is able to create a more enjoyable itinerary for her. McGraw-Hill learns that Jeremy struggles with compound-interest calculations, and is able to direct his attention to material that covers exactly that weakness. Netflix learns that Venkat likes political satire, and can make more pertinent suggestions to him of what movies he would enjoy.
Second, beyond this customer-specific learning, the firm can engage in population-level learning, allowing it to adjust its existing portfolio of products and services. Disney learns that the general demand for frozen yogurt is increasing, so it can add more stands serving frozen yogurt. McGraw-Hill learns that many students struggle with compound-interest calculations, so it refines its online module on this topic. Netflix observes that many viewers like political dramas, so it licenses additional series in this genre. Moreover, population-level learning may allow a firm to know more about its customers than any of its suppliers do, thereby enabling it to create new products and services. Having deeper customer insight allows McGraw-Hill’s content producers to add new educational experiences, and Netflix to move into movie production itself.
Over time, these two levels of learning have another very important effect: firms are able to address more fundamental needs of customers. McGraw-Hill might learn that its customer wants not just to learn financial accounting but in fact to make a career on Wall Street. Nike might find out that a particular runner is interested not just in keeping fit but also in training to run a first marathon. This knowledge can lead to opportunities to create an even wider range of services and to trust relationships between firms and customers that become very hard to break by competitors. To build these trusted relationships, customer data needs to be used in transparent and secure ways, a topic we return to at the end of chapter 5.
Chapter 6, “Workshop 2: Building Connected Customer Relationships,” concludes part II of the book by guiding you through a series of exercises that will assist you in creating connected customer relationships.
Part III: Creating Connected Delivery Models
Once you have an idea of the type of connected relationship you want to design for your customers, the question is how to implement this relationship in a cost-effective way. You need to create a connected delivery model. These models consist of three parts, which form the subjects of the next three chapters.
HOW THIS BOOK CAME TO BE
At the Wharton School, both of us teach in the MBA and executive education programs, and we are codirectors of the Mack Institute for Innovation Management. In the last few years, as new and existing firms disrupted their industries by fundamentally changing how they connect with their customers, we have begun to think about the principles underlying their success. At the same time, more and more managers have come to Wharton Executive Education to learn how to create opportunities for their own businesses using these principles. As a result, we set out both to help managers navigate the world of the Internet of Things, the sharing economy, platform strategies, deep learning, fintech (financial technology), and so on, and to provide them with a tool kit to create connected strategies for their own organizations. Our thinking was sharpened and refined through hundreds of sessions with executives and MBA students. The stories they shared of their own experiences and challenges were essential feedback as we developed the framework we now call connected strategy. The book you hold in your hands (or read on the screen) is the result.
As in any research, we have stood on the shoulders of giants. We have greatly benefited from the broad-ranging research by Michael E. Porter, who has investigated the impact of the internet and new technologies on strategy for a long time. The work by Adam M. Brandenburger, Harborne W. Stuart Jr., and Barry J. Nalebuff had an important influence on our discussion of value and willingness-to-pay in chapter 2, while the customer journey we discuss in chapter 4 has its intellectual foundation in the work by Ian C. McMillan and Rita Gunther McGrath. The insightful work by Andrew McAfee and Erik Brynjolfsson on the impact of new technologies on firms and society has always been stimulating for us. Finally, we have been inspired by our friends, colleagues, and coauthors David Asch and Kevin Volpp, whose pioneering work on hovering over patients while outside the hospital has influenced our thinking on connected customer relationships. Obviously, many others have influenced our thinking and work. For readers who would like to dive deeper into the related academic and applied literature, we have compiled a detailed sources section at the end of the book.
In chapter 7, “Designing Connection Architectures,” we lay out different ways in which firms can reshape the network of connections among the various players in their ecosystems. Ride-hailing firms such as Uber and Lyft have created connections between previously unconnected parties: individuals with cars and individuals looking for a ride. Such a configuration of the value chain has its advantages, but there are many alternatives. In the world of mobility, Daimler has decided to create its own car-sharing service (Car2Go), forming a direct connection between a manufacturer and customers. In contrast, Zipcar, another car-sharing operation, has connections to both car manufacturers and renters, as it has to purchase cars before it can rent them out. Finally, ride-sharing service BlaBlaCar operates a peer-to-peer network of drivers who offer each other rides whenever an empty seat is available.
CONNECTED STRATEGY VERSUS PLATFORM STRATEGY
The last couple of years have witnessed an enormous success of so-called platform strategies. Connected strategies are different from platform strategies; in fact, you can create value with connected strategies without being a platform.
Platform businesses are not directly involved in serving customers by providing them with goods or services. Instead, their focus is on connecting the producers and customers of such products or services. For example, Uber does not own cars. It connects drivers and their cars with passengers who want a ride. Apple’s app store primarily does not sell Apple software. It connects app developers and their software with customers who want to use it. Rather than owning real estate, Airbnb focuses on connecting folks who have empty rooms, apartments, or houses with travelers in need.
A platform really serves two sets of customers. First are those who provide the products or services that are transacted on the platform, be it app developers, drivers, or landlords. And second are those who consume those products or services, s
uch as owners of smartphones, passengers, and travelers. Platform businesses need to appeal to both sets, which is why they are often called two-sided markets. Success is typically achieved by providing a platform for payment, trust building, and dispute resolution and by providing liquidity to the market, making sure there are enough customers to make it worth the providers’ effort to join the platform and vice versa.
Though platforms crucially depend on connectivity and are an important design element of our connected strategy framework, they differ along the following important dimensions:
Platforms are a particular type of what we call connection architecture. Connected strategy, however, also involves creating a connected customer relationship. For instance, Disney has created strongly connected relationships with its customers, but most of us would not refer to Disney as a platform.
With the success (and hype) around platforms, the term has unfortunately become rather diffuse and is applied to many different models. As we will see in chapter 5, platform is really an umbrella term for several different connection architectures. When Amazon, a platform company, sells through its own warehouses, billions of dollars of fixed assets in real estate, buildings, and logistics are involved. When Amazon facilitates a sale through its Marketplace platform, none of these assets is involved. These are very different business models! Similarly, while Airbnb and Facebook are both platforms, one is connecting customers to individuals who serve as suppliers (of accommodation), whereas the other connects individuals who do not engage in a business transaction. Again, these are very different connection architectures that will require, for instance, very different revenue models.
On most platforms, the relationship between customers and providers is primarily a transactional one, and the revenue model of the platform is to take a cut from these transactions. In contrast, the ultimate goal of connected strategies is to transform episodic transactions into long-term customer relationships precisely to avoid transactional pricing.
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