Connection Matters

October 17, 2019

Nicolaj Siggelkow is Professor at Wharton School, University of Pennsylvania. He is Author of Connected Strategy.

In this fast-evolving world—where technology is advancing at an unprecedented pace—connections have turned out to be that crucial link to success for businesses. Diligent are those who redraw their customer approaches and design a connection strategy.

In our interactions with many business executives over the last years, we have increasingly found that managers are struggling with how to create new business models, given a confusingly broad range of technological developments: the Internet of Things, wearable fitness devices, crowdfunding, robo-investment advisors, 3D printing, deep learning, the list goes on…

 

Christian Terwiesch is Professor at Wharton School, University Of Pennsylvania. He is Author of Connected Strategy.

As researchers and educators, we took this as an opportunity and a challenge: how could we help managers, as well as our students, navigate this fast-evolving world? In our research, two common themes emerged, both related to connections. First, companies are fundamentally changing how they connect to their customers. Savvy firms are shifting from occasional, episodic interactions—where customers realize they have an unmet need and then look for ways to fill it—to staying continuously connected to their customers, providing services and products even before customers are becoming aware of these needs. Firms are creating what we call ‘connected customer relationships’. Second, firms are starting to connect previously unconnected players in their ecosystem using a variety of different ‘connection architectures’. Ultimately, the various combinations of connected customer relationships and connection architectures create a range of ‘connected strategies’. What makes connected strategies so powerful is that they are often a win-win: customers get a dramatically improved experience, while companies boost operational efficiency. As a result, connected strategies create disruptions in many industries.

To provide managers with a tool kit to create connected strategies for their own organizations, we set out to identify the various types of connected customer relationships and connection architectures that firms can employ. Through our research—and continuous feedback from the various audiences that we used to road-test and refine our ideas—we identified four connected customer experiences that successful companies pursue for turning episodic interactions with their customers into connected relationships:

  • The first we called ‘respond-to-desire’, which seamlessly provides customers with services and products as soon they recognize what they need. Customers in need for a ride can order a vehicle using Uber or Lyft just as easily as they can ask Alexa to order pizza or play their favorite song.
  • The second, ‘curated offering’, presents customers with a set of personally tailored options that might interest them. Rather than just fulfilling the order from the customer, firms help them in their choice– Netflix recommends a movie to watch and TripAdvisor suggests an itinerary for the next trip to Paris.
  • The third, ‘coach behavior’, encourages customers to adjust their behavior in order to achieve larger goals or reduce costs. The Apple Watch starts to vibrate after recognizing a prolonged period of its owner’s inactivity and the virtual investment advisor encourages consumers to increase their savings rate.
  • Finally, the fourth, ‘automatic execution’, anticipates and meets the needs of customers even before they have become aware of those needs themselves. An ambulance is called as the connected home realizes that somebody fell down the stairs and an investment portfolio is rebalanced to match its investor’s risk preferences.

We want to stress that we certainly do not believe that automatic execution is the most desirable customer experience for every transaction. Customers differ in how much agency they prefer, and for some transactions the risk of getting it wrong with automatic execution outweighs the benefits. While technologists might see automatic execution as nirvana, good old-fashioned customer understanding is necessary to offer the most relevant experience to customers, which may require firms to create a range of connected customer experiences.

Illustration by Swapnil Redkar

When considering connection architectures—the second element of a connected strategy—a natural starting point was to look at platforms, an area of intense interest, research, and investment. Unfortunately, with the success (and hype) around platforms, the term has become rather diffused and is applied to many different models, creating sometimes more confusion than clarity. ‘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.

While technologists might see automatic execution as nirvana, good old-fashioned customer understanding is necessary to offer the most relevant experience to customers.

In our research, we have identified five different connection architectures:

  • connected producers: Traditional producers such as Disney, Nike, and Daimler have created platforms within parts of their businesses by changing how they connect to their customers and by moving from episodic interactions to continuous connected customer relationships. A runner might use the Nike platform to log her miles, but this platform is a technology platform, not a two-sided market.
  • connected retailers: Traditional retailers ask customers to come to their store and to buy what they have. Connected retailers make the choice process and the ordering of, payment for, and receipt of the product much more convenient for a customer. From Amazon for books, and Netflix for movies, to meal-kit providers for groceries, connected retailers create a much closer relationship with customers, which allows customization and the reduction of pain points along the entire customer journey.
  • connected market makers: These firms create a market (a platform) by connecting supplier firms with customers. Examples include Expedia, Priceline, and Amazon Marketplace. Connected market makers are the bazaar operators of the twenty-first century. They neither buy nor sell; they just make sure the right buyer is connected to the right supplier. This approach sounds like the dream of every operations manager: it seems as if this approach requires almost no capital (capacity, inventory) while also being free of any operational risk. However, to succeed with this connection architecture, a firm needs to be able to attract both buyers and sellers (create a two-sided market) and provide them with liquidity and trust.
  • crowd orchestrators: In contrast, these firms cannot rely on existing suppliers. A key task of a crowd orchestrator is to mobilize individuals to serve as suppliers—for example, of driving services (Uber), shopping help (Instacart), accommodations (Airbnb), or financial resources (Kickstarter). The key challenge is to attract customers while the set of suppliers is still small. Once a critical mass is reached, though, two-sided network effects kick in: the more suppliers that are available, the more customers will come; the more customers that come, the higher the incentives for more suppliers to join.
  • peer-to-peer network creators: These firms form and organize communities of users, blurring the lines of consumers and providers. Again, network effects play an important role in the sustainability of firms with this connection architecture. If the value a customer derives from a network increases with the number of participants (eg, as the number of posted reviews increases), then larger networks will tend to attract more new users, increasing network size even more.

Since each connection architecture can be used to create different customer experiences, we can now paint the playing field for connected strategies. We can create a matrix that has the customer experiences on one axis (the rows) and the connection architectures on the other axis (the columns). We call the resulting matrix the Connected Strategy Matrix (see figure 01).

Figure 01 Connected Strategy Matrix

Source: Connected Strategy: Building Continuous Customer Relationships for Competitive Advantage

In our work with organizations, we have found the matrix to be useful for two different purposes. First, it is a great mapping tool for both a firm’s own activities, and the activities of competitors and new entrants. Second, the connected strategy matrix provides a very structured way to guide idea generation. By going through each cell and asking yourself, “If our firm had a strategy in this cell, what would it look like?”, we can be very systematic in the way we generate new business ideas.

Yes, we acknowledge that the matrix is a bit more complicated than the typical 2×2, but the world is unfortunately a bit more complicated than that. At the same time, there are also not an infinite number of possibilities. By making the complexity manageable, the matrix provides managers with a useful new tool to create connected strategies that can help their firms to create a competitive advantage in the marketplace.

 

This article is based on the book Connected Strategy: Building Continuous Customer Relationships for Competitive Advantage.