Connected Strategy Read online

  CONNECTED STRATEGY

  Building Continuous Customer Relationships for Competitive Advantage

  Nicolaj Siggelkow

  Christian Terwiesch

  HARVARD BUSINESS REVIEW PRESS

  BOSTON, MASSACHUSETTS

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  Copyright 2019 Harvard Business School Publishing Corporation

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  Library of Congress Cataloging-in-Publication Data

  Names: Siggelkow, Nicolaj, author. | Terwiesch, Christian, author.

  Title: Connected strategy : building continuous customer relationships for competitive advantage / Nicolaj Siggelkow, Christian Terwiesch.

  Description: Boston, Massachusetts : Harvard Business Review Press, 2019. | Includes bibliographical references and index.

  Identifiers: LCCN 2018047850 | ISBN 9781633697003 (hardcover)

  Subjects: LCSH: Relationship marketing. | Customer services—Technological innovations. | Communication in consumer education.

  Classification: LCC HF5415.55 .S55 2019 | DDC 658.8/12—dc23 LC record available at https://lccn.loc.gov/2018047850

  ISBN: 978-1-63369-700-3

  eISBN: 978-1-63369-701-0

  To my dad, who would have been

  the proudest reader

  (NS)

  To my parents, who taught me more about

  business than any school ever could

  (CT)

  CONTENTS

  Prologue: The Magic of Connected Strategy

    1.  The Connected Strategy Framework

  PART ONE

  THE REWARDS OF CONNECTED STRATEGIES

    2.  Breaking the Trade-off between Superior Customer Experience and Lowering Costs

    3.  Workshop 1

  Using Connectivity to Provide Superior Customer Experiences at Lower Costs

  PART TWO

  CREATING CONNECTED CUSTOMER RELATIONSHIPS

    4.  Recognize, Request, and Respond

  Building Connected Customer Experiences

    5.  Repeat

  Building Customer Relationships to Create Competitive Advantage

    6.  Workshop 2

  Building Connected Customer Relationships

  PART THREE

  CREATING CONNECTED DELIVERY MODELS

    7.  Designing Connection Architectures

    8.  Revenue Models for Connected Strategies

    9.  Technology Infrastructure for Connected Strategies

  10.  Workshop 3

  Building Your Connected Delivery Model

  Epilogue: Seizing the Connected Strategy Potential

  Sources

  Index

  About the Authors and Acknowledgments

  PROLOGUE

  The Magic of Connected Strategy

  The practices of entertainment giant Disney illustrate a seismic shift in how firms create competitive advantage through what we term connected strategy. Firms with a connected strategy fundamentally change how they interact with their customers and what connections they create among the various players in their ecosystem. At its core, a connected strategy transforms traditional, episodic interactions with customers into connected customer relationships that are characterized by continuous, low-friction, and personalized interactions.

  For years, Disney has organized mini-camps for children as part of its cruise operations. Stressed-out parents on a Disney cruise can drop off their kids for a few hours in order to get some private time on board. Disney has always taken its responsibility for the children in its care seriously. Until 2005, this meant stopping camp activities every thirty minutes for roll call, thus creating extra work for the staff and interrupting the fun. In 2005, Disney began using monitors to track their small campers—monitors originally developed in the medical field to keep track of dementia patients who were at risk of wandering off. The children were outfitted with little bracelets that identified them and pinpointed their location within the ship.

  This was the starting point for a whole new Disney experience named MagicPlus. With the ability to know the identity and location of every guest, Disney soon asked how else it could use MagicPlus to enhance the guest experience and improve operational efficiency.

  The answers that emerged touched on a remarkably broad range of its theme park operations. As part of its meet-and-greet program, Disney characters routinely interact with young guests in the park. Before MagicPlus, later renamed MagicBand, Disney’s cast members posing as Mickey Mouse or Captain Jack Sparrow knew little about the children. With the MagicBand, Mickey and the captain not only knew each child’s name but were also aware of the family’s prior visits to Disney theme parks around the world. If six-year-old Sydney met Mickey Mouse last year in Orlando and this year was at the Anaheim park, Mickey would “remember” the first encounter, making the child’s experience truly magical.

  Beyond creating enhanced customer experiences, the MagicBand also improved park operations, thus reducing Disney’s costs—a truly magical outcome from a business perspective. From tracking food orders to handling guest complaints, from identifying each guest to having access on a tablet to all their prior interactions with cast members, efficiency was greatly improved. Moreover, the MagicBand allowed guests to make reservations at busy attractions for predefined time windows, slashing their wait times. This enabled Disney to direct the stream of visitors and jump-start operations at the beginning of the day, increasing the overall number of visitors that could be handled by a theme park while maintaining a great visitor experience.

  Connected strategies unfold in a rapidly changing environment. Given its success, one would imagine that Disney would equip every park with the MagicBand. But this is not the case. When Disney opened its Shanghai Disney Resort, it decided against the move. It wasn’t that the Chinese failed to appreciate the magic. Instead, by the time of the park’s opening, a more efficient alternative had arrived, and almost every visitor already had this magical technology in his or her pocket: a smartphone. Equipped with the right apps, today’s phones offer all the information and access to Disney that the MagicBand had provided.

  The common theme of the Disney story and many more case studies in this book is that we are living in a world where new forms of connectivity are transforming the way companies do business. Connected strategies allow you, as an executive, to create superior customer experiences while simultaneously achieving dramatic improvements in operational efficiencies. In short, connected strategies can substantially relax the trade-off that firms
have traditionally faced between providing superior customer experiences and lowering costs. Adopting connected strategies allows firms to create a formidable competitive advantage. Not surprisingly, their rapid rise is creating new winners and losers in its wake.

  The technologies behind connected strategies are improving at a dizzying speed. The world’s estimated three billion smartphones pack the power of supercomputers from only a decade ago. The Internet of Things enables instant communication among systems that couldn’t talk to each other before. Wearable health and fitness trackers now rival traditional medical devices in their accuracy. And recommendation systems driven by artificial intelligence deliver insights faster than humans ever could. With all these advancements, magical user experiences are coming to life in many industries. What is fascinating, however, is that the technology per se is usually relegated to a supporting role. The key innovation of connected strategies lies in their revamping of a firm’s business model. Consider the following four examples.

  Amazon redefined how retailers interact with customers. Until recently, customers were forever making long shopping lists and driving to various stores. Now, they can tell Amazon’s Alexa to order food, clothing, or just about anything else, and the products are delivered to the customer’s house, sometimes within hours. Beyond Alexa, Amazon also introduced the Dash Button, a small Wi-Fi device that customers can attach to the refrigerator, washing machine, or bathroom vanity and press to reorder bottled water, detergent, toilet paper, and much more.

  College textbook publishing is also going through a fundamental transformation. In the old days, students would buy or rent their textbook, read the assigned chapters (or at least intend to do so), and then prepare for their final exam by tackling a set of practice problems at the end of each chapter. Now, McGraw-Hill Higher Education, for example, has abandoned the word book and instead aims to sell digital learning experiences. Not only are the books fully digital, they are also smart. As students go through the semester, technology tracks their reading and feeds the data back to the professor and the publisher. When a student is struggling with an assignment, the book redirects the student to the appropriate chapter and potentially offers a short video message on how to handle a similar assignment. Each student thus receives a curated and customized learning experience, rather than a standard textbook, and textbook publishers are moving beyond their traditional role to become tutors as well.

  Customers used to interact with Nike once a year to buy running shoes, and that interaction was actually with a shoe retailer, not Nike. Now, customers purchase a wellness system that includes a chip embedded in the shoes, software that analyzes their latest workout, and a social network with other Nike runners for support. Customers interact daily with Nike, allowing the company to transform itself from shoe manufacturer to purveyor of health and fitness services, and to coach customers to achieve their goals.

  Millions of consumers have embraced wearable technologies and let devices such as Apple Watch or FitBit track their daily lives. Some extreme users, also known as quantified selves, are measuring every aspect of their bodies, from glucose levels to body weight to nutrition to sleep cycles. When Apple knows more about a patient than her doctor, this has major implications for the health care industry. Many digital delivery systems are integrating this data stream with the patient’s electronic medical record. In the old days, patients and doctors would see each other during periodic visits. Now, changes in body weight or blood pressure and medication compliance are reported to the care provider daily, prompting timely action triggered by abnormalities in the data feed. At the cutting edge, firms like Medtronic have gone one step further. Some implanted devices not only track health data and communicate it but are even smart enough to take action automatically when they detect abnormal patterns in clinically relevant variables.

  As you might have noticed, there are two common threads to these developments. First, firms are fundamentally changing how they connect with their customers. Rather than having episodic interactions, firms are striving to be connected in a continuous way, providing services and products as the needs of customers arise, sometimes even before customers have become aware of their own needs. These firms create a connected relationship with their customers.

  Second, firms not only address a wider range of needs, they do it at lower costs. For most of its business, Amazon doesn’t need expensive retail outlets; the customized, artificial intelligence–based tutoring by McGraw-Hill forgoes expensive instructors; the motivation to achieve goals in Nike’s system is created by a peer-based network, not personal trainers; and the implanted medical devices that automatically take action also save money by avoiding hospitalizations. The potential of connected strategies is to create customer experiences that feel like magic while improving operational efficiency to enhance financial success.

  Given their tremendous potential, connected strategies create great opportunities for you—but also for all of your current and future competitors! Connected strategies will lead to disruption in many industries. At a time when a mobility platform is valued more than some of the biggest car companies in the world, increases in connectivity can often be seen more as a threat than an opportunity. But, in almost any industry, potentially disruptive threats come and go, and at any given moment you might fear disruption from a dozen different new ventures. Which ventures will survive? Which ones are truly disruptive? We hope that the frameworks and tools in this book will not only help you in creating your own connected strategy but also provide you with a new perspective, allowing you to separate technological hype from true strategic challenges.

  What is a connected strategy? What tools and frameworks can you use to build one for your organization? How does it help you create a competitive advantage? What are great examples to learn from? Answers to these questions are at the heart of this book.

  1

  The Connected Strategy Framework

  A good way to start understanding connected strategy is to consider the traditional relationship between customers and companies. Traditional interactions start when customers realize they have an unmet need. This need could be the desire to see Mickey Mouse and ride a roller coaster, the dream of mastering financial accounting, or the urge to get into shape before summer arrives. Customers then figure out how they want to fulfill this need. They browse theme parks on Expedia, they look for accounting books at Barnes & Noble, or they consult with friends or the local gym on how to train for a triathlon.

  At some point, customers attain a level of knowledge that sparks action to put some money on the table. They book a ticket to Disneyland, they buy an expensive textbook, or they sign up for a weeklong training camp. But there is considerable friction in the traditional transaction: customers spend a significant amount of effort to search, request, and receive the product or service they desire.

  Firms sit on the other end of these traditional transactions. Yes, they can use marketing dollars to influence the customer along the journey to place an order, but they have limited connections to that customer. Their episodic interactions start only once the customer has placed an order, and they end on delivery of the product.

  In traditional interactions, firms work hard to provide high-quality products and services as quickly as possible and at a competitive cost. They manage and perfect their marketing and operations within the model of episodic sales, but they are inherently limited by the lack of deep connections with their customers. Traditional episodic interactions between customers and firms usually require customers to invest significant effort in figuring out a solution to their needs, then requesting and receiving the product or service. Moreover, there often exists a gap between what the customer wants and what the firm provides. This gap can be a temporal gap (the customer must wait), or a gap between what the customer really wants and what the firm has to offer.

  A firm that is able to move from episodic interactions with its customers to a connected relationship overcomes these shor
tfalls. Consider again the power of the MagicBand. Disney used to have only a handful of interactions with its visitors, and those happened at well-defined intervals—when they came to the park and bought a ticket, or when they ordered cheeseburgers at the restaurant. Now, sensors track the guests via their MagicBand every step and every second. The MagicBand not only reduces the effort in ordering and receiving cheeseburgers or souvenirs, it tailors the experience by making suggestions to the visitor.

  Similarly, McGraw-Hill originally interacted with a reader only when selling a book, and even that connection was delegated to a retailer, similar to the case of Nike. But today, every time the reader looks at the book or tackles a practice problem, a connection is established that allows the publisher to learn about the reader, curate its offering, and coach the student when he or she is stuck. Meanwhile, in health care, the connected strategy moves the doctor-patient relationship from an episodic encounter every few months to a continuous flow of data from the patient to the care team, enabling medical needs to be addressed before they become severe.

  Moving away from episodic interactions toward a connected relationship turns a theme park into a magical experience, transforms a book publisher into a creator of learning journeys, and revamps a hospital system into a proactive care organization. Such deeply connected relationships create more loyalty and higher profits.

  Connected strategies don’t just happen; they need to be carefully designed. They have two key elements: a connected customer relationship and a connected delivery model. The connected customer relationship is what delights the customer. The connected delivery model is what allows the firm to create these relationships at low cost. Each connected customer relationship and delivery model is the result of strategic choices along several design dimensions. Let’s look at these in figure 1-1.

  FIGURE 1-1

  The connected strategy