In an increasingly competitive marketplace, it’s no longer good enough for company to sell a product through a simple, one-time transaction with shoppers they may never see again. Businesses can create more value for themselves and their customers if they learn to develop a connected strategy. That’s the message from Wharton professors Nicolaj Siggelkow and Christian Terwiesch in their new book, Connected Strategy: Building Continuous Customer Relationships for Competitive Advantage. By leveraging technology, firms can gain more intimate knowledge of their customers, even anticipating and fulfilling their purchasing needs before the customers themselves know what they are. Siggelkow, a management professor, and Terwiesch, a professor of operations, information and decisions, are co-directors of the Mack Institute for Innovation Management. They spoke to Knowledge@Wharton about the lessons offered in their book and why it’s a good place to start for businesses looking for longevity.
An edited transcript of the conversation follows.
Knowledge@Wharton: You start your book with a story about Disney and its MagicBand service. What does it reveal about the way companies deal with their customers and how that has changed?
Nicolaj Siggelkow: Usually, the connection you had with Disney was a ticket. You would hand over the ticket and enter the park, and that was the transaction that you had. Nowadays, the MagicBand allows you, as a customer, to have easy, frictionless transactions. It opens up your hotel room. It opens up the fast lane. You can easily purchase things with it. Of course, that sometimes makes also the bill rather magical at the end of the trip because you didn’t even notice all you were purchasing because it was so easy to do. But from the customer perspective, it makes it a very nice experience.
What it allows Disney to do is to really know where everyone is within the park. As a result, they can direct you, for instance, to a line of an attraction that is shorter. Or you can pre-program a particular itinerary. That allows Disney to jumpstart operations at the moment they open up the gates to the park. In some senses, this is where we call it the magic of the Magic Band or the magic of the connected strategy: it makes the customer happier, while at the same time drives efficiency for the company.
Knowledge@Wharton: What does this signify for the way in which companies relate to their customers? How does this story give us insights into how that is changing?
Christian Terwiesch: Every company has to answer two questions: what and how. What can I do to delight the customer? How do I provide a magical customer experience? That is the element that Nicolaj just touched on when he talked about opening your room wherever you are, ordering meals, having a memory book automatically created. All of that is very exciting, and that drives up the willingness to pay.
I’m an operations professor, and when I hear all the marketing people talk about those customer experiences and the wow, I’m just going, “Who’s going to do the work, and who’s going to pay for that?” Part of the magic with connected strategies is that we’re changing the way that we work. We can, as Nicolaj said, jumpstart operations. We can do a better job at scheduling people. We can automate some of the things. It allows us to provide these better customer experiences at lower fulfillment costs, potentially. That is ultimately what shifts that frontier. That trade-off that you always have between the customer delight and the fulfillment, it shifts that frontier out. And that’s where you gain competitive advantage.
Knowledge@Wharton: Let’s go a little bit deeper into what this means. What is a connected strategy and why should companies be thinking about it?
Siggelkow: Connected strategies have two elements to them. There is what we call the connected customer relationship. Rather than waiting for a customer to come to us with a particular need, and then we may have something that you want or maybe not — a connection we call, “buy what we have,” and that is quite often how firms still interact with their customers – we get a much deeper relationship with the customers that allows us to anticipate needs and to have a much more continuous relationship, rather than episodic interactions.
The second part of the connected strategy relates to what Christian was just talking about. How do we create these connected customer relationships at a very low cost or with high efficiency? That’s the second part we call the connected delivery model. How do we connect various players in our ecosystem to make this relationship happen?
Knowledge@Wharton: I would assume that you would need a fair amount of underpinning of technology in order to make these connections happen. What are some of the technologies that are involved in the development of connected strategies?
Terwiesch: I don’t want to downplay the role of technologies here. Clearly, a lot of these things have only become possible with the arrival of connected technologies. If you think about the Disney MagicBand, it started as a wearable device that people would have on their wrist. Many of the modern parks are basically getting the same user experience by just leveraging your smartphone. If you think about it, every one of us here has a MagicBand in their pocket, and that has in many ways democratized the connected technologies. It used to be something that only wealthy, well-endowed firms could play with; now every startup can start providing these magical customer experiences. Without painting a picture that technology is not important, I think the big question that we see companies wrestling with is the imagination of new business models. What user experiences do you provide? How do you use the technology to drive down the fulfillment costs? That is less of a technological problem, but ultimately a business model problem.
Knowledge@Wharton: Could you give two other examples from the book of a connected strategy?
Siggelkow: I’ll take one, and then Christian can take another one. Let me go to running shoes because I think this is a wonderful example. It used to be that the only connection I had with Nike is every one-and-a-half year, when I would buy a pair of new shoes. Of course, then my connection was not with Nike, it was with Foot Locker or wherever I would purchase these shoes. Nowadays, I don’t buy shoes anymore. I buy a shoe with a chip embedded. The chip talks to my cellphone. That cellphone connects me to my virtual running club. And all of a sudden, Nike has a daily interaction with me. They know when I use the product, how I use the product.
What Nike can do now is try to fulfill a deeper need that I have. My need is not to run; my actual need is that I want to finish my first marathon. Now we have a very different value proposition for Nike of helping you with that life goal, rather than just that you run. Nike cannot provide all the services that I need, but they can maybe connect me to some of these services. They don’t have to backward integrate into becoming running coaches or connecting me to their employees, but they can connect me to some other people who love to run or some coaches if I need some professional advice.
It’s having this deeper relationship. Now I know more about you, so I can create a much deeper relationship and help you achieve some deeper goals. At the same time, I’m connecting you to some other parties that you were not connected to previously, which allows me to create this customer experience and relatively high efficiency.
Knowledge@Wharton: That’s fascinating.
Terwiesch: One of the first use cases I got interested in was the world of connected health care. I have a secondary position at the Perelman School of Medicine, and I’ve done a fair bit of formal research with my friends Kevin Volpp and David Asch. If you think about health care, it has been very episodic in the past. If you get sick, you go in the hospital. While you’re in the four walls of the hospital, the hospital does everything for you. It’s taking care of you really well, spending tons and tons of resources. The moment you get discharged, you’re on your own. Then you’re struggling with things such as living a healthy lifestyle, education, adherence, other health choices.
If you think about either post-discharge or in the preventive space, most of the health decisions that will impact our lives are happening outside the walls of the health care system. So, the value proposition of connected health care is keeping me healthy, as opposed to just letting me see a doctor. That is another one where we’ve done a bit of research. We describe it in the book, and we see enormous potential for this.
Knowledge@Wharton: Could you talk about the connected strategy business model and how it helps companies to create a sustainable, competitive advantage?
Siggelkow: Those are two difficult questions. Let’s start with the last one because I’m the strategy guy. I have to answer the question around sustainable competitive advantage because it links back to what Christian was just saying. The good news about connected strategies is, quite often, the technologies that you need to create them are available. You don’t have to develop them; others have already developed them. Google has developed Google Maps. Someone has developed 5G. As a firm, I don’t necessarily have to become a technology company.
The bad news is all my competitors also have access to the same technology. I think what we are seeing is a lot of these ideas about deeper relationships, personalization, they all become table stakes. Everyone will do this. That’s why we feel this is a really important phenomenon, because if you don’t do it, you certainly will have a disadvantage.
The bad news is even if you do it, you may not have an advantage because everyone else is also doing it. To us, the source of sustainable competitive advantage through connected strategies comes from what we would call the repeat loop, that you’re doing it again and again and again. If you use the fact that I have now more interactions with you — I’m learning more about you and about people like you, so I’m learning both at the individual level and at the population level — that kind of insight that I can gather is probably more difficult to copy than a particular technology that I put in place. That’s on the sustainable competitive advantage front because I think that’s really important.
Since we are in the world of IPOs of Uber and Lyft, the question is not why is Uber better than a cab company. Uber is a nice example of a firm that has created a product that customers like more, and they can create that product at lower cost. That really disrupted that industry. But the critical question is why is Uber better than Lyft? That’s a much harder question. So, firms can push out the frontier. But if other firms can find that same spot on that new frontier, you still don’t have an advantage.
Terwiesch: That leaves the question of the business model and, in particular, the revenue model somewhat unanswered. Let me try to tackle that. In the old days when you wanted a product or a service, you would just pay a transaction price. You would want to have a toothbrush, you’d want to see a dentist, well, there’s a price for that. And you would pay that price and receive that service or that product.
If you think about connected devices, think about a toothbrush, for example, that would be able to analyze your teeth, do some diagnostics, provide you feedback about your brushing behavior, and even alert your dentist when it sees a cavity. You can provide different forms of revenue models so that suddenly the toothbrush could not be sold for just the price. In fact, the toothbrush could be free to the consumer. The consumer pays 10 cents per minute of brushing. I could say the toothbrush is paid for by the dental insurance. It is paid by the dentist. I could make it pay for performance, which is a big buzzword in terms of revenue models. I could say the toothbrush is getting a fee per week or per month that my teeth are healthy. It’s basically aligning the incentives in the value chain, which previously was not possible because we just did not have the information about the performance, the usefulness and the value that the customer derives out of a product or a service.
Knowledge@Wharton: In your book, you say that connected strategies need to be carefully designed. Why?
Siggelkow: When we think about these different connected customer experiences, we sketch out four different ways of how we see firms connecting with customers. Before going there, it’s helpful to think about when you interact with a customer, there’s a whole customer journey a customer has with you. It’s not just the product or service that they like; there are lots of other steps involved. A customer needs to become aware of their needs, then a customer needs to say, “OK, how can I fulfill these needs? What are the options? What’s the best option for me?” That’s not an easy problem. I have to go about ordering this product. I have to pay for it. I have to receive it. Then finally I can experience it. Then it’s some sort of after-sale service, maybe support. So, there’s a whole customer journey.
A connected customer experience is what we call respond to desire. Here, a customer knows precisely what he or she wants, and they want to press the order button and have the rest of this customer journey be as frictionless as possible. Then we have the curated offering, which works a little bit earlier in the customer journey. Here, I’m really trying to help you to understand all the options and what might be the best option for you. Then there is the coached behavior connected customer experience, where we say, “OK, once in a while you are aware of your needs, but maybe once in a while a tap on the shoulder is helpful.” Hey, have you really taken your medicine today? Have you exercised? As a firm, we understand your need before you realize that you have the need. And if you’ve given me permission, I will just solve that problem for you. Right? That’s the idea about your printer running out of toner, so it just [automatically] reorders the toner.
We have these different kinds of customer experiences that we can create. The important point coming back to the design question is that we do not think there’s one-size-fits-all. We certainly do not think that automated execution is always the best way of dealing with a particular situation. Customers will differ a lot in their preferences of how much they want to do things versus have the firm do for them. Some customers say, “Well, give me some choices and I’ll choose. That’s exactly what I need.” Others say, “Please, just do it for me.” Even the same customer in different situations will have different preferences. We need to understand what kind of connected customer experience you are comfortable with? What kind of customer experience would you really value? That’s where the design part comes in. Firms need to have a whole range of different connected customer experiences available for different customers with different situations.
Knowledge@Wharton: You’re saying that a behavior that some customers might welcome because it takes the burden off them, other customers might find intrusive?
Terwiesch: Absolutely. What Nicolaj just articulated in terms of these four different connected relationships is true on the operational and on the fulfillment side. If you think about how are you going to fulfill the demand, what are you going to do to delight the customer? You can think about Disney, which is a pretty integrated firm. You go to a theme park, and they just control all of that. At the other extreme, you can think about platforms like Uber and Lyft. Neither really employs drivers or owns cars, with very few exceptions. They basically act as market makers. Then at the very extreme, think about peer-to-peer networks such as a Wikipedia or Patients Like Me. It’s not even clear who’s providing the service and who’s benefiting from the service. It’s just a network. Just like you have to be intentional about what kind of relationship you offer to your customer, you have to be intentional about how are you going to do that.
That creates a little framework that we call the connected strategy matrix. You have to think about these four different customer relationships. You have to think about what we call the five different connection architectures, which give you 20 different options. It sounds intimidating, but we found that it’s a very helpful tool for you to think about how else could I delight a particular market segment? Where is there a potentially disruptive threat emerging by a startup that I see elsewhere? We find that mapping and describing this connected strategy matrix is a very helpful exercise.
Knowledge@Wharton: Can you talk about the four-step customer framework of recognize, request, respond and repeat?
Siggelkow: That really goes back to the customer journey. The first thing is that we have to recognize a customer need, or we have to help the customer recognize what need it is that they have. This is the front-end of the customer journey.
I know there is a need, now I need to figure out the best option, and how do I actually order that? That’s the request part. I’m taking that information about the customer and translating it into an action. It’s an order for a particular solution, which requires me to first understand what is the solution that I want to order.
Then there comes the respond part. As a firm, I get this information either from you, or I have deduced that is the best option that you want. Do I have this option on my shelf? Am I able to get it to you in a timely fashion? That’s what we would call that connected customer experience: the recognizing, requesting, responding.
Then comes that last, that repeat loop. Can I do this again and again and again? And by doing this, can I learn more about you, learn more about customers like you, and become better over time in those three other Rs? If you can get onto that positive feedback loop, that’s where the sustainable advantage might come from.
Knowledge@Wharton: As companies think about developing and implementing these customer journeys and connected strategies, what are some of the pitfalls they should be aware of?
Siggelkow: One pitfall, as Christian already explained, is focusing on the technology because that’s the most visible aspect. “Oh, the MagicBand, how cool is this?” It’s something that you wear here and then we have the pile-ons, and we need to put the network in place. That’s clearly important, but that’s the easy part of putting a connected strategy in place.
We were able to talk to some of the people at Disney who created the MagicBand, and they said the more difficult part was the organizational part of implementing this. Because in order to create a consistent customer experience, what has to happen? The customer needs to feel like they’re dealing with the same organization, whether they go online and book, whether they get to the hotel or the theme park. The problem is that, up to that point, a customer had to work through the organizational chart. Now you have to deal with our online division. Oh, this problem? You deal with the theme park division. Oh, this is the restaurant division, right? The customer had to work through this, and one part of the organization didn’t know about that customer in the other part of the organization. You were treated every time as if you were a different person.
Again, customer centricity is a key word. Every company wants to do this, but hardly any company is actually organized around that because we organize by functions. And there are good reasons why we organize that way. However, that makes it really hard, for instance, to treat the customer as the same customer whenever we see them, whether online or on the phone or whatever. But unless we get to that point of recognizing that’s the same customer, it will become very hard to learn more and more about that customer, to really accumulate the learning. It sounds so easy, right? We repeat and then we learn. But that’s really the hard part, and that’s partly a technology issue. Do we have the IT systems in place that can talk to each other and make the data exchange feasible? Quite often, it’s also an organizational issue. Do we even have the incentives to send my data over there? Because maybe now he knows something that he shouldn’t know, or I don’t get promoted but he does. It’s those issues that are quite often quite difficult.
Terwiesch: I would add that a lot of the technologies that we describe in the book, like curating offerings, learning from the repeat cycle, customization in general, they’re all very big data type of applications. At Wharton, we are the school of big data, data analytics. We believe in this methodology. But I think there’s also a real opportunity for small data here. Think about the pain points, about products or sources. Nicolaj’s example about the running shoe purchase is not just about the shoe, it’s about self-fulfillment. It’s a very emotional thing. If you think about pain points when it comes to getting clinical care, when it comes to financial savings or retirement, those are very personal things. This whole customer journey is something that management has to go out and study. You find these insights best by interviewing people, by going out there yourself, even at an executive level, and leveraging what I call small data, contextual immersion. We teach this in our innovation and design courses. Be willing to do the qualitative user research, as opposed to just relying on click streams and big data.
Siggelkow: The first pitfall is that it’s all about the technology. I think the second pitiful is that it’s all about the data. A lot of firms currently are stuck in is this notion that it’s data that’s important, and it’s relatively easy to gather data. Everyone is gathering a lot of data. Now I have every click you’ve ever done on my website, but I have no idea what to do with it. This is exactly what Christian was saying. Probably the better way is to first ask, what are the pain points we want to resolve? And then, what kind of data do I need to resolve these paint points? Too often, it’s like, “Let’s just collect everything and then figure out what to do with it.”
Knowledge@Wharton: As connectivity continues to increase, how do you see the future of connected strategy?
Terwiesch: In the 1980s, I had a class on computer networks with a famous textbook by a guy called professor Andrew Tannenbaum. That was the only subject I got a D in. I remember sitting there and saying, why would it make sense to connect to computers to each other? Clearly, I failed at becoming a technology visionary. I think the evidence on very smart people, from the stories of IBM and Microsoft, is that they’re full of bad predictions. Technology for 10, 15 years is very hard to predict. The one prediction that I’m comfortable making is that we’re going to be more connected and not less connected. I think that one is a fairly safe prediction.
Knowledge@Wharton: What does that imply for connected strategy?
Siggelkow: The general thrust that we see is towards personalization. We can do that now in a more cost-effective way because I can learn about you more cost effectively. I’m able to respond to this in a more cost-effective way. I think that is the general trend we’re going to see.
The underlying technologies to do this will evolve. But I think that is something that the generation that’s growing up right now, they’re getting used to that. It’s this notion of Amazon knows everything about me or makes it really easy for me to order. I now go to my doctor and have to fill out all of these forms again — why is that? I think that expectation will rise, similarly to how the expectation of our business students here will rise, about how customized is my learning journey? I think those things will inevitably happen, partly enabled through the connectivity, enabled by data analytics, enabled by data. But, hopefully, a deeper understanding of how to use that data will also support it.
Terwiesch: Nicolaj was describing these four connected customer relationships, and it sounds so much that everything could be automated. Everything could be moved away from one firm into market makers, ultimately into peer-to-peer networks. That is not our prediction. Oftentimes, if you ask yourself as a consumer what you want, as long as a firm is reasonably responsive to your needs and desires, you’re totally fine making the purchasing decision yourself. Not everything will be automated for the consumer.
Knowledge@Wharton: Let’s imagine that a CEO has just finished reading your book and is convinced that connected strategy is the way to go. Can you offer some advice on where to begin?
Siggelkow: Absolutely. The first step you’ve already taken: You’ve gotten our book. What was quite a pleasure for us to do in writing this book was that we were teaching it while we were writing it. Our objective was to make it as applicable as possible. I think what sets our book apart is that we have these three workshop chapters where we take the CEO or the manager by the hand and say, “First think about these questions, then think about these questions. Fill out this worksheet. Fill out these worksheets.” I think the first question is to figure out what would it mean if I knew customers’ needs before the customers know them themselves. What would this information allow me to do? Then, more systematically, a good starting point is to map out a customer journey and to think about the pain points, think about willingness-to-pay drivers, think about what information currently flows, what information flows you need, and go from there.
Terwiesch: Those workshop chapters give you something concrete to do. Each chapter has four, five, six, seven steps that you can work on. If you’re still struggling, on our website, ConnectedStrategy.com, we have case studies that we worked on with companies. We worked with some very smart MBA students to avoid the situation where you sit in front of a blank piece of paper and don’t know where to start. What you have is a starting point with other companies who have gone through that journey. That allows you to say, “Well, my company is different. Oh, then let me change that part of the worksheet.” You don’t have to start from scratch. You should be in good shape to take the next step.