Other connected strategies have arisen in the grocery space, creating an entirely new frontier in this industry. Consider the same-day delivery service Instacart. Instacart has focused on one particular pain point, the shopping itself. Instacart creates new connections between customers who need groceries and individuals who work as shoppers. It has created a connection architecture we will call a crowd orchestrator. Using the Instacart app, customers can shop virtually at a range of local stores, including grocery stores, pet supply stores, and pharmacies. Paid shoppers will then go to these stores and pick up the items the customer ordered. Deliveries can happen in as short as an hour or can be scheduled for later. This service raises a customer’s willingness-to-pay by saving him or her time. Given that shoppers can buy for more than one person at a time, the purchases are done more efficiently, driving down cost. As we depict in figure 2-3, the main result of Instacart is also a shift of the frontier. In this case, it pushes up the willingness-to-pay more than it reduces fulfillment costs.
FIGURE 2-2
Pushing out the efficiency frontier
Around the world, we are observing a range of experiments that use connected strategies to raise the willingness-to-pay by improving the customer experience and simultaneously reducing fulfillment costs. In India, a number of e-grocers, such as BigBasket, have sprung up that allow customers to order from over twenty thousand products, including fresh fruits and vegetables, via an app and have them delivered to their homes. For a smaller group of essential items, ninety-minute delivery is also available. Customers’ willingness-to-pay is increased, as the shopping can be done more quickly, while BigBasket does not have to invest in costly brick-and-mortar stores.
In South Korea, Tesco, a grocery retailer based in the United Kingdom but with extensive global operations, experimented with novel ways to engage customers in new environments. Tesco faced the challenge of trying to market itself to young urban professionals who did not have time during their day to visit stores. Tesco decided to utilize the country’s high degree of smartphone adoption to reach these customers in places they do frequent: subway stations. Tesco created virtual stores on the walls of subway stations using life-size posters depicting grocery store shelves stocked with products. Customers felt as if they were standing in front of real shelves. The products featured in the posters displayed QR codes to be scanned by subway patrons using Tesco’s Homeplus app. Delivery would often be scheduled for the same day so that purchases arrived as customers got home from work.
With its Homeplus app, Tesco created a respond-to-desire relationship, making it easier to shop for and receive merchandise. Moreover, their product posters also served as a coach behavior platform, reminding customers to buy groceries at an otherwise idle time, during their wait for a subway. By easing the customer journey, Tesco raised the willingness-to-pay of time-pressed customers relative to traditional grocery shopping. At the same time, it increased its sales while avoiding the cost of additional storefront real estate. Putting it all together, we can see that Tesco Homeplus effectively pushed out the efficiency frontier. It raised the willingness-to-pay and simultaneously decreased costs (see figure 2-3).
In China, Alibaba operates an increasing number of Hema supermarkets. Using the Hema app, customers can buy fresh food from home, have it prepared by chefs, and then have it delivered to their homes—all in thirty minutes. For other grocery orders, in-store shoppers fill the customer’s order, putting the shopping bags on a conveyor belt that carries them to a delivery center adjacent to the store. If a customer prefers to pick his or her own food, especially fresh seafood, the customer can come and select it. Every item has a scannable barcode yielding price and product information, including the origin and even the backstory on the item. Customers use Alipay to pay at the checkout stand. Over time, Hema’s app learns the customer’s preference and creates more customized offerings.
FIGURE 2-3
New efficiency frontier in the grocery industry
Other shopping innovations include stores that have no checkout lines at all. Instead, cameras follow customers and automatically tally up the products that they remove from shelves. Both Amazon, with its Amazon Go stores, and JD in China are pursuing this. Customers’ willingness-to-pay is raised through reduced checkout hassles, while costs are reduced by lowering labor costs.
As our shopping trip around the globe reveals, grocers face a trade-off between customer delight, as captured in their willingness-to-pay, and fulfillment costs. Successful retailers should not accept the existing trade-off; they should break it.
The New Efficiency Frontier in Mobility
To see in more detail how connected strategies can relax the traditional trade-off between cost and quality, let us move from the world of grocery retailing to the world of mobility and take a deep dive into the ride-hailing industry. From Didi in China, Careem in the Middle East, Ola in India, Grab in Malaysia, and Yandex in Russia, to Uber and Lyft in the United States, these companies have fundamentally changed how people think about getting around town.
PARETO DOMINANCE AND SHIFTING THE EFFICIENCY FRONTIER
A strategy is said to Pareto dominate another if it can achieve both higher willingness-to-pay and lower costs. Thus, Pareto dominance is at the heart of our definition of the efficiency frontier. Every airline executive likes airplanes that provide passengers with big seats and that are inexpensive to operate. Those airplanes—economists also call them “production technologies”—Pareto dominate the ones with small seats and high operating expenses. Typically, however, airline executives have to choose between airplanes that have large seats and high costs and those that have small seats and low costs. If those are the only options, neither Pareto dominates the other and so both of them can be on the efficiency frontier. Which production technologies to choose from the efficiency frontier can be difficult to determine and will depend on market segmentation and firm strategy. (See the sources section for information on the related role of Pareto dominance and the efficient frontier in finance.)
The promise of connected strategy is that management does not have to limit its attention to making choices from among technologies that define the current efficiency frontier. Instead, we argue that by forming connected customer relationships and by using connectivity to create new connection architectures and new revenue models, it is possible to change the efficiency frontier. Consequently, successful implementations of connected strategy create Pareto-dominating strategic options—happy customers at lower fulfillment costs.
The reason why ride-hailing services have gained so much popularity is that they most often provide a better service to their customers than traditional taxis and do so at lower costs. Ride hailing has shifted the efficiency frontier in the mobility industry.
To see how ride-hailing services have pushed out the efficiency frontier, we can ask the following two distinct questions that go to the heart of connected strategies:
How can we change the way we connect with our customers? How can we deepen the connections between the company, drivers, and customers? The parties being connected in this case remain the same, but the depth of their connections is increased, leading to lower costs and a superior customer experience. In essence, we put bigger information pipes between the existing entities.
Can we change whom we connect? A typical cab company has a fleet of some fifty to five hundred vehicles to meet demand. Ride-hailing services, in contrast, have many thousands of privately owned vehicles available in metropolitan areas. Moreover, they can rely on crowdsourcing to ensure the quality of their drivers, as opposed to relying on government regulators to take on the task of vetting them. This second case is one of connecting entities that previously were not connected—that is, putting in new information pipes.
Creating Deeper Connections among Existing Parties
To understand how deeper connections among existing parties can create more value, let’s summarize the pain points from the perspective of
the customer and the inefficiencies from the perspective of the drivers. In chapter 4, we will more formally introduce the concept of a customer journey and how to spot such pain points. For now, let’s just see what a customer prefers about a ride-hailing company compared to a taxi cab—that is, how ride-hailing companies have pushed up the willingness-to-pay of customers:
Convenient ordering: Using an app is far easier than hailing a cab from a street corner, calling a dispatcher, or lining up at a taxi stand. All of these require a fair bit of customer effort; hence, none of these modes is particularly customer friendly. This is especially true at the busiest hours for cabs. For example, in New York City, 70 percent of the cabs are utilized on Thursday evenings.
Convenient payment: With cabs, each transaction begins with the pickup and ends with the drop-off. No payment information is stored beyond this. Ride-hailing companies do not require the customer to carry cash or to deal with (possibly broken) credit card machines within cabs, and payments, including tipping, happen within the app.
What about the driver? Cab drivers face several operational inefficiencies that add to the fulfillment costs without increasing the customer’s willingness-to-pay. The substantial capital outlay for a cab medallion means that cabs must be in nearly constant use to be profitable. (Even after the large price drop for a medallion caused by ride-hailing companies, each taxi that you see in New York has almost as much capital tied up in it as a Rolls-Royce Phantom!) If run well, ride-hailing companies can achieve significant advantages in utilization rates. For instance, in New York, Uber’s utilization rates exceed cab utilization rates by 5 percentage points. In other metropolitan areas, Uber is able to achieve more than a 20 percentage point advantage in utilization, which reflects three inefficiencies of cabs:
Finding a fare: Many cab drivers spend a good chunk of their time waiting in line at taxi stands for a passenger. For instance, New York cabbies spend 50 percent of their time on the road without a passenger.
Routing: Even worse for the cab’s efficiency is the situation in which the driver picks up a fare from a prespecified location. The meter starts running only when the customer enters the car. Human dispatchers are not only expensive, they are also limited in their computational power. Finding the optimal vehicle for a customer request requires smart algorithms and connections to the entire fleet in the market so that the best-positioned one can be chosen to fill a request—something that the cab company lacks and that leads to the lower utilization rate just mentioned.
Payment: At the end of a ride, the passenger pays the driver. This might be the most rewarding part of the ride for the driver, but is a waste of capacity. Cabs make money from driving, not from standing still while waiting to process credit card payments.
Ride-hailing companies’ success in addressing these customer pain points and overcoming these inefficiencies is the first reason why they have been able to provide a superior service at lower costs. This brings us to the first question of a connected strategy: How can we deepen the connections between existing parties and get more information through these pipes?
For cab companies, this question has been answered by a number of apps, including GetTaxi, Curb, EasyTaxi, MyTaxi, and many more. These apps aim to improve the connection between a passenger and a cab; in fact, many of them were launched well before ride-hailing companies entered the market. Enabling customers to order a cab via the app turns every block in town into a virtual taxi stand. Also, payment can be streamlined as customer and company are connected through the download of an app, improving both the customer experience and the productivity of the driver in the form of higher utilization. Finally, a fleet management system can be introduced to connect all cabs in a fleet, enabling better matching between an incoming customer request and a driver, which reduces the amount of idle time, further improving driver productivity and utilization.
This improvement in connectivity is shown in table 2-1. We can think of the right-hand column in the table as a connected cab company. This company uses an app to better link to its customers and process payments, and it tracks its vehicles using GPS.
The use of technology to create deeper connections with customers can also be seen in many other examples we discussed previously:
Using the MagicBand makes food orders at Disney easier for visitors, leading to a higher willingness-to-pay, and the entire ordering and payment process is fully automated, leading to lower fulfillment costs.
Smart and fully digital textbooks are easier to produce than traditional paper books. Their embedded software also makes it easier for the school or university to grade homework assignments and exams, increasing faculty productivity.
Many health care systems now (finally) provide something that has long been a standard feature in most other industries: online booking of an appointment. Rather than going through the annoying and complex scheduling over the phone, patients can conveniently book appointments online. If more urgent care is needed, some hospitals now enable patients to videoconference with their care team directly.
TABLE 2-1
Benefits of creating deeper connections
Connection
Status quo cab
“Connected cab”
Passenger to vehicle
Flagging, dispatcher, taxi stand
App
Payment
Cash, credit card
Automated in-app purchase
Vehicle to vehicle
Dispatcher, two-way radio
GPS tracking, fleet management system
Improvements
• More convenient ordering
• No wasted time for payment
• Better routing
Deepening the connections between the existing players can transform a business. Yet for all the enhancements implemented by the connected cab company, it is still constrained by its existing connection architecture. Let’s now look at the second key element of a connected strategy: creating new connections.
Creating New Connections
The success of ride-hailing companies is not a result of being a better and more connected cab company. Their success is mostly driven by their ability to connect previously unconnected parties. Most cities have several cab companies, each with its own fleet. Ride-hailing companies, in contrast, do not own and operate vehicles. Instead, they connect individually owned vehicles throughout town to form a virtual fleet. They merely act as orchestrators, something that we discuss further in chapter 7. This virtual fleet is much larger than any cab company could ever be. This makes it easier for the ride-hailing company to cover the entire town, which increases the likelihood that a vehicle is close to a customer in need of a ride, resulting in shorter customer wait times and the higher utilizations mentioned before. Utilization is further increased because drivers don’t waste time picking up and dropping off vehicles at the beginning and end of their shifts, since they simply use their own car.
Ride hailing and vehicle utilization are also improved through the practice of surge pricing. Not only are all active drivers for a ride-hailing company connected, but so are those who are currently inactive, doing other things. Ride-hailing companies often institute surge pricing in the evenings, but only at particular times. It often happens in the early evening (when folks head out), less frequently around eight o’clock at night (when folks are out), and then peaks at eleven o’clock at night (when folks want to get home). As passengers, we find surge pricing a nuisance. But it is an important component of ride hailing, just as revenue management (aka dynamic pricing) is part of selling airline tickets and hotel rooms.
Adjusting pricing in real time has two benefits. We are familiar with the first one from the airlines. Management consultants and other business executives rarely fly on Saturday afternoon. But the airlines have fixed capacity and would waste a lot of money if their planes sat idle on Saturday afternoons, so they offer steep discounts. The same happens in reverse on Monday mornin
g when the partner in the consulting company really needs to meet that CEO in Cleveland and is willing to pay double the price. As a result, our consultant flies on Monday, and the college student heading back to Ohio State travels on Saturday. Markets are more efficient in the coordination of resources if they let prices adjust. Because the regulated cab market does not allow for price adjustments, cab owners cannot imitate this strategy. Many ride-hailing companies, however, have fully embraced dynamic pricing.
In the case of ride hailing, there is another benefit of dynamic pricing. An airline has a fixed capacity. It would love to have extra planes and pilots on Monday morning, but the costs of that capacity are too high, so there is no flexibility. Ride-hailing companies, however, have flexible supply. For the typical twenty dollars per hour, a ride-hailing driver might prefer to take the evening off. But for forty dollars per hour, during surge pricing, things are different. Previously inactive drivers get into their cars and provide the ride-hailing company and its passengers with the capacity exactly at the time they are most needed.
A remarkable aspect of surge pricing is that it not only reacts to real-time changes (when it rains, more passengers need a ride), but it can also be very targeted toward specific locations. This further helps activate and direct capacity to where it is needed the most. Surge pricing puts the right incentives in place in order for the drivers to do what is best for the overall system. When demand is low, drivers switch to other tasks, including other work and personal time off. As a result, not too many drivers are sitting idly in their vehicles and waiting for passengers, which avoids wasting labor costs. When demand picks up again, drivers provide the needed capacity and start driving. This activates capacity when needed, which avoids long waiting times for passengers.
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