Besides restricting entry to the taxi industry, cab medallions have traditionally served a secondary role. They provided customers with at least a modicum of trust in the car and driver. Historically, it was the role of the municipality to create trust by requiring cab operators to acquire a medallion. How are the quality and the safety of the vehicle in the ride-hailing industry ensured now that (almost) anyone can be a driver? Again, creating new connections has a role in this. Because customers rate their ride through the app, ride-hailing companies connect passengers to each other, allowing them to share their experiences. This is a much cheaper mechanism of certification than the city authority selling high-priced medallions. Driver reputation and trustworthiness are crowdsourced. Similarly, ride-hailing drivers also use the app to rate their passengers, which can help protect other drivers from picking up potentially unpleasant fares—a benefit not available to traditional cab drivers.
Building a huge virtual fleet of privately owned vehicles, adjusting fleet size to demand through surge pricing, and replacing the expensive medallions with a mechanism for crowdsourcing reputation all require a delivery model that is built on creating new connections. Such a connected strategy simply cannot be imitated by the cab companies because no company using medallions can start employing just anyone with a car who wants to be a driver.
Table 2-2 summarizes this approach of connecting previously unconnected entities in an industry. Again, this part of connected strategy—putting in new information pipes—is by no means limited to transportation:
Airbnb connects travelers to empty rooms, houses, and the people who want to play host part time or full time. This idea really goes back to prior sites such as HomeAway (which includes VRBO, Vacation Rental by Owners) that leveraged empty vacation homes (owners of vacation homes are not in their vacation homes all year). Importantly, this capacity is inexpensive because it would otherwise be unused.
TABLE 2-2
Benefits of creating new connections
Connection
Status quo
Ride hailing
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
Vehicle to vehicle outside the fleet
—
Connects all vehicles on the platform
Idle drivers and unused vehicles
—
Connects to drivers who are presently not driving
Passenger to passenger
—
Crowdsource driver reputations
Driver to driver
—
Passenger ratings leading to driver safety
Improvements
—
• Higher vehicle utilization
• No medallion needed
• No wasted time for driver to pick up and drop off car at the beginning and end of shift
ZocDoc allows physicians to post open appointment slots online, where they can be booked by patients. When an appointment is made, the patient is pleased to have found care, while the physician is happy to bring in an extra patient.
In the same way OpenTable matches restaurant tables with eaters, Kayak matches travel capacity in the form of airline seats with those who want to book a flight, and StubHub helps fans find tickets for games and concerts while also increasing the occupancy of the stadiums.
RELIEVING HUNGER THROUGH CREATING NEW CONNECTIONS
In the United States, seventy-two billion pounds of perfectly fine food from restaurants, catering, and event companies end up in landfills every year. At the same time, one in seven people goes to bed hungry. A lack of connectivity has created this paradoxical state. Goodr, an Atlanta-based food-waste management company, tries to alleviate this situation by creating new connections. Through an app, clients notify Goodr that they have surplus food. Goodr picks up, packages, and transports the food to nonprofits that distribute it to those in need. Goodr keeps track of the amount of food donated, making it easier for firms to take advantage of tax benefits. All parts of the transaction are logged via a blockchain application, creating a reliable record from donation to distribution of the food. Goodr finances itself through fees based on pickup volume that are less than the tax benefits that firms receive, creating a win-win situation for both firms and once-hungry clients. In the first fifteen months of operation, Goodr has been able to redirect nearly one million pounds of food—or about 850,000 meals.
In sum, similar to innovators in the grocery space, ride-hailing companies have effectively shifted out the efficiency frontier: the superior customer experience comes with lower costs. This is what has made ride-hailing companies such a game changer in the transportation industry in many markets around the world.
Further Shifting the Frontier by Creating New Connections
How can we reduce costs further still? As a passenger waits for a ride from A to B, chances are that there are many cars driving almost the exact same route. Most of them are likely to only have one person in the car. In the United States, the average number of passengers in a vehicle is about 1.5. Why add another car (and pay for the car and the driver)? Why not just help some of these drivers who own their vehicles and are already driving with the aim of getting from A to B make some quick cash? This is the idea of BlaBlaCar.
BlaBlaCar is a European carpooling company in the business of connecting potential passengers with empty seats. Carpooling is an old idea that has been used for decades by parents, commuters, and college students. But, thanks to improved connections, carpooling has seen tremendous growth. The driver of the car is driving the distance no matter what, so the cost of adding a passenger is extremely low.
Instead of paying for labor and ownership of the vehicle, all that needs to be paid for is the gas. If the driver shares this expense with one or even multiple passengers, costs come down even more. BlaBlaCar leaves pricing at the discretion of the driver, but common price points are between ten and twenty-five cents per mile, which is about a tenfold improvement over traditional ride-hailing and even more compared to cabs. Technically speaking, the fulfillment costs are limited to the extra fuel consumption that results from adding a passenger and the added time for the extra pickup and drop-off.
Note that BlaBlaCar is doing much more than connecting potential passengers with drivers. Instead of ride-hailing companies’ virtual fleets of drivers acting as service providers, every vehicle on the street can now be seen as a potential service provider. In this business, the lines between passengers and drivers have become blurred. In chapter 7, we will discuss such new business models based on connecting individual customers to each other as peer-to-peer networks. The following examples show the extensive reach of these connection architectures:
What BlaBlaCar is to Uber, Couchsurfing is to Airbnb. Today, Mike sleeps in your apartment, and tomorrow, it might be the other way around.
PatientsLikeMe connects patients to others who have similar conditions, facilitating information exchange regarding treatment options and outcomes and forming a powerful network. Initially focused on chronic conditions, such as ALS and lupus, the company has expanded to accept any patient with any condition, currently serving more than six hundred thousand members. Patients are able to learn and improve their outcomes based on previous experience for free, while researchers can gather data about what is working and develop better treatments.
Online dating platforms such as eHarmony and Match.com are now the starting point for an estimated 5 percent of all new marriages in the United States, not to mention that well over one million babies have been born because their parents were matched by a computer algorithm. When it comes to loving relationships, both partners are, pardon the wording, customers and suppliers. Both request and respond. So, having two lonely h
earts sitting at home and wishing for a partner is a waste.
To be fair, unless you are super social and enjoy being with other people rather than playing around with your phone, the willingness-to-pay for a BlaBlaCar is likely to be lower than for a ride-sharing car. Beyond the potentially chatty company in the car, finding a vehicle that gets you where you want, when you want may also require some compromise in destination or travel schedule.
Connected Strategy and Competitive Advantage
In this chapter, we saw how the grocery and ride-hailing industries are being transformed by firms using connected strategies. In both settings, we saw how connected strategies can lead to more convenience: Having the right groceries delivered to your doorstep or using the walls of a subway station as a virtual supermarket is making grocery shopping more convenient. Ordering a car via an app with automatic payment processing is likewise increasing convenience.
But connected strategies are not only about convenience and the resulting higher willingness-to-pay. Unless we provide products and services efficiently, we might not be shifting the efficiency frontier. Here is where a deep dive into the operations that create and deliver the products or services is required. In both grocery retailing and ride hailing, we saw that costs are driven by many activities, some of which might not be adding value to the customer experience. Having a large store might look nice, but if what the customer wants is simply a visual display of groceries, any wall coupled with augmented reality will do the job. And why pay a fortune for a cab medallion if what customers really want is trust, which can be produced through crowdsourcing at a much lower cost?
The efficiency frontier will be our guiding compass throughout the remaining chapters. If a firm is able to shift the frontier—that is, if a firm is able to widen the gap it creates between the willingness-to-pay of its customers and the fulfillment costs it incurs—it has taken an important step toward creating a competitive advantage.
But, unfortunately, shifting the efficiency frontier does not always guarantee that you will achieve a competitive advantage that is sustainable at least for a few years. Why not? While it is easy to see how Blue Apron has shifted the frontier and might win out over having to shop at farmers’ markets, it is much more difficult to figure out why Blue Apron’s willingness-to-pay/cost gap is larger than that of HelloFresh or meal kits that Amazon or Walmart offers. As a matter of fact, Blue Apron has been struggling to retain its customers because these competitors were able to occupy a very similar location on the new, pushed-out efficiency frontier.
Likewise, it is much harder to see how Uber’s willingness-to-pay/cost gap is larger than that of other ride-hailing companies—a problem that Uber was not able to overcome in China, where they lost against Didi. Just creating connected experiences is often not enough to achieve a sustainable competitive advantage. Once you’ve shown the world a new trick, other firms will imitate you. In order to create a sustainable competitive advantage, not only do you need to create connected experiences, you also need to create connected relationships—the heart of a connected strategy.
As we will see in chapter 5, it is especially through the repeat dimension of connected strategies that you can build a sustainable competitive advantage for your firm. Through repeated interactions, you are able to continuously refine your ability to recognize the needs of your customers, to translate those needs into a request for an optimal solution, and to have the ability to respond to these requests. Powerful positive feedback effects allow you to create long-lasting relationships with your customers and such scale economies in your connected delivery model that competitors will have a very hard time offering a better value proposition to customers.
We would like to emphasize one more point: we are convinced that not creating a connected strategy is a road to eventual extinction for most firms. Technological and innovative forces all point toward increased connectivity. At the same time, customer expectations are moving toward increased personalization created by deeper connections. As mentioned before, increased connectivity will become table stakes in many industries. As a result, not providing customers with connected relationships will lead to significant competitive disadvantages for your organization.
Connected Strategy and Privacy
Connected strategies are fundamentally based on a rich information flow between the customer and the firm. It is this information that allows a firm to personalize the customer relationship and to gain efficiencies in its delivery model. At the same time, customers—be they firms or individuals—are naturally wary about sharing this information. As a result, trust and privacy concerns are central to creating long-lasting connected strategies.
In the right hands, previously privately held information can be used to create value-enhancing transactions—for example, by being able to design products that better fulfill customer needs. But in the wrong hands, this information can be very harmful to customers. We find it helpful to distinguish among three types of costs that customers might incur:
There typically exists some personal information in our lives that we would prefer not to share with others. This might include our financial situation, medical information, our sexual preferences, our political views, or our grades in college. Even though our life might not change a lot if our neighbor knew that we only got a C− in accounting, we would prefer to keep this information to ourselves. If this data can be used by firms, individuals, or governments to harass or persecute us, or to target us in order to influence our behavior with misleading information, the damage can be tremendous. Thus, there exists a potential cost of reducing personal (emotional) safety when data is used beyond the purposes for which it was originally sanctioned by the customer.
Besides an emotional cost, sometimes data can be used against us to cause a monetary loss. We might have a genetic condition that would prevent us from getting life insurance; we might get higher quotes from our plumber if he knew the balance of our bank account; or we might receive offers for risky financial investments right after we left a bar where we consumed one too many drinks. In a business-to-business setting, we might worry that our data will leak to competitors, or that our supplier, after finding out that we have a severe shortage, will use this information against us by raising prices.
Personal information might also be exploited by criminals. When we book a flight to Hawaii and this information becomes public, we basically put up an Open for Business sign for the local burglar community. Likewise, if our Social Security number falls into the wrong hands, we open ourselves up to the risk of identity theft.
Social stigma, various forms of discrimination, and outright criminal activity are all good reasons for protecting the privacy of those who have entrusted us with their data. This is true for all types of data, but it is especially important for data obtained as part of a connected strategy. One reason for this is that data created in a connected relationship tends to be richer, more current, and more confidential than data obtained in episodic relationships (if any data is collected at all in those interactions). Another reason is even scarier. Because of the automated nature of some elements of the connected relationship, customers are not only at risk of having strangers access their data, but hackers could also control the temperature of their houses, open and close the doors, control their connected cars, or steal money out of their bank accounts.
To create a connected strategy, trust between the firm and the customer becomes an essential element. A loss of trust will damage or end long-term relationships with customers very quickly. Data collection can either engender trust or destroy it. A core question you need to ask is, How do our data collection and usage affect our customers’ trust in our company? Best to ask it early—and often.
When firms don’t get the trust equation right, connected strategies can backfire. Remember the well-publicized story of Target inferring the pregnancy of a young woman from her buying habits and sending her coupons for maternity clothing, making her dad confused and angry becaus
e he didn’t know about the pregnancy, or the questionable and unauthorized use of Facebook data by Cambridge Analytica to affect voting in the 2016 US presidential election, or various Google apps tracking location information despite a user’s having turned off location history. Such missteps can be very costly and cause your customers to lose their trust in your ability to keep their data confidential and to use it responsibly.
Moreover, firms developing novel connected strategies can find themselves in regulatory gray zones. Should drivers for ride-hailing companies be considered employees or independent contractors? Should staying in an apartment rented via Airbnb be considered an illegal short-term rental? Should recordings gathered automatically by Amazon’s Echo devices be able to be requested as evidence in court cases? These are all legal issues that are currently being worked out. As you develop a connected strategy for your firm, you must stay abreast of the regulatory changes that affect you.
The Disruptive Potential of Connected Strategies
We covered a lot of ground in this chapter. In the next chapter, we will guide you through a workshop that will allow you to start applying the first concepts of connected strategy to your own organization.
To summarize, we first introduced the concepts of willingness-to-pay and the efficiency frontier of an industry. The attributes of your product or service and the way you interact with your customer affect your customer’s happiness, which translates into willingness-to-pay. At the same time, you incur fulfillment costs in trying to create this customer experience. In other words, there is a trade-off between willingness-to-pay and fulfillment costs. Different firms will strike a different balance between willingness-to-pay and cost; they will position themselves differently in the marketplace. By plotting firms and their various positions, we can identify the efficiency frontier in an industry. The efficiency frontier is defined by those firms who are furthest out in the willingness-to-pay/cost space. These firms are able to achieve the maximum willingness-to-pay given their level of fulfillment costs (or, conversely, they are able to minimize cost given their level of willingness-to-pay).
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