The Wharton School’s Nicolaj Siggelkow (professor of management and strategy) and Christian Terwiesch (professor of operations and innovation) are co-authors of Connected Strategy: Building Continuous Customer Relationships for Competitive Advantage, released on May 21st. Here, the co-directors of the Mack Institute for Innovation Management reveal how businesses can spur long-term growth and efficiency by designing their own connected strategy.
“Many industries are transforming the way they connect with their customers, moving from episodic interactions to a frequent and data-driven relationship. This transformation, which we refer to as building a Connected Strategy, can be seen in many industries ranging from banking to healthcare. One industry in which connected strategies have already succeeded is ride hailing, and this success teaches us two important lessons about how to implement a connected strategy.
The first lesson of connected strategy is to deepen connections between firms and customers by taking out friction and increasing convenience. Ride-hailing companies like Uber and Lyft have established a much deeper connection between drivers and their passengers than jumping onto the street to flag a cab. This close connection via an app raises customers’ willingness-to-pay by making ordering and payment more convenient.
At the same time, the deeper connection also decreases fulfillment costs.
For drivers, finding fares is faster, rides are optimized by algorithms that locate the best vehicle for where the customer is and where they are going, and time spent collecting payment is eliminated.
All of this translates into a higher vehicle utilization rate: more time is spent driving customers (earning money) and less time wasted on other things (finding fares and spending time collecting payments).
In theory, cab companies could replicate many of these advantages of deeper connections by developing their own apps. But ride-hailing companies are not just better-connected cab companies. Beyond simply making existing connections deeper, they also have formed new connections, which gets us to the second lesson of connected strategies: create new connections, connecting previously unconnected parties to each other.
A typical cab company has a fleet of some 50 to 500 vehicles. Ride-hailing services, in contrast, connect with thousands of people who might never have become cab drivers, making it easy and cheap to cover a whole territory continuously. Such new connections not only help by creating a large virtual fleet, but also build flexibility as many of these new vehicles and drivers can be activated on demand.
New connections are also formed among the passenger community. Crowdsourced reviews put quality control in the hands of the customers rather than regulators. Lastly, drivers similarly 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. All of this has been a result of new connections.
The second lesson of creating new connections can be pushed further still, moving beyond those who think of themselves as driving for a living and those who want to hire a cab or an Uber. This is the idea of peer-to-peer networks.
Consider BlaBlaCar, a popular ride-sharing service in Europe. As a traveler ponders how to get from A to B, there are many cars likely driving a similar route. Why not help some of these drivers make some quick cash by picking up a paying passenger?
At BlaBlaCar, the driver of the car is driving the distance no matter what, so the cost of adding a passenger is extremely low. BlaBlaCar’s peer-to-peer network creates a virtual fleet of drivers acting as service providers, ultimately turning every vehicle on the street into a potential service provider. In this business, the lines between passengers and drivers have blurred.
These two lessons of deepening existing connections and expanding the network of connected parties are 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 capacity is inexpensive because it would otherwise be unused. The suppliers and supplies are new – tens of thousands of people who never thought of being innkeepers are playing host using rooms in their homes. And, as many who have used Airbnb can attest, the experience can be superior to what hotels at a similar price point provide. What BlaBlaCar is to Uber, the peer-to-peer network Couchsurfing is to Airbnb. Today, Mike sleeps in your apartment, and tomorrow, it might be the other way around.
- Patientslikeme.com connects patients who have similar conditions, forming a peer-to-peer network that facilitates an exchange of information on treatment options and outcomes. Initially focused on chronic conditions, such as ALS and lupus, the company has expanded to support patients with any condition, currently serving more than 600,000 members. Patients learn about their conditions and improve their outcomes based on connecting with each other for free, while researchers can gather data about what is working and develop better treatments.
- Kayak.com matches travel capacity in the form of airline seats with those who want to book a flight. StubHub helps previously unconnected fans find tickets for games and concerts while also increasing the occupancy of the stadiums.
The 4 Rs
These examples and our two lessons of connected strategy have an important implication for innovators. New business models can be created by deepening existing connections or by connecting parties that had not been connected in the past. But envisioning and executing this continuous cycle depends on the four Rs:
- Recognizing a customer need and identifying a solution, which should lead a customer to make a…
- Request for a desired option, which will then trigger your company to…
- Respond, and then…
- Repeat, ultimately building a lasting connection with customers that competitors simply can’t match.
As an innovation manager, how will your company deepen the connections to your customers? And, what new connections will you create?”
A Professor of Management at the Wharton School, University of Pennsylvania, Nicolaj Siggelkow co-directs the Mack Institute for Innovation Management with Christian Terwiesch. Having spearheaded groundbreaking research on strategy, he was named a Fellow of the Strategic Management Society and co-hosting a weekly radio show, Siggelkow studied Economics at Stanford University and Harvard University (Ph.D. in Business Economics).
Christian Terwiesch is a professor of Operations and Information Management at Wharton and co-directs Penn’s Mack Institute for Innovation Management. With extensive experience in MBA teaching, online courses and executive education, He has authored several books and published in many of today’s leading academic journals, and hosts a national radio show. He holds a doctoral degree from INSEAD and a Diploma from the University of Mannheim.