Running shoes with embedded chips. Reading in the cloud. According to Mack Institute Co-directors Nicolaj Siggelkow and Christian Terwiesch, companies such as Nike and McGraw-Hill can use digital tools to create satisfied, loyal customers. In this episode of Mastering Innovation on SiriusXM Channel 132, Business Radio Powered by The Wharton School, they discuss these examples from their new book, “Connected Strategy: Building Continuous Customer Relationships for Competitive Advantage.”
Siggelkow and Terwiesch explain why they say that the connected customer relationship and the connected delivery model are key to businesses engaging customers affordably and influencing their future buying decisions.
An excerpt of the interview is transcribed below. Listen to more episodes here.
Transcript
Saikat Chaudhuri: What do you exactly mean by a “connected strategy”?
Nicolaj Siggelkow: Good question. To us, connected strategies have two elements to them. What we are seeing across a lot of industries is that firms are fundamentally reshaping the way they’re connecting to their customers. Rather than having a few episodic interactions where a firm waits for a customer to come in with their needs, firms are much more continuously now connected to customers, and that allows them sometimes to even anticipate the needs of the customer. So that’s one part of the connected strategy, which we call the connected customer relationships.
Now, the second part of a connected strategy is that I need to create these in-depth connected customer relationships at an affordable cost. And so, the second part of a connected strategy is a connected delivery model where firms are, again, connecting new players in the ecosystem that previously were not connected. By putting these two things together, connected strategies allow firms to have a better value proposition to customers, or they push up the willingness to pay that the customers have, while at the same time reducing the cost.
Christian Terwiesch: Like in any strategy, you have to answer two questions: There’s a what and there’s a how. What is it that you’re doing to delight the customer? Meaning, what is it that you’re doing to push up the willingness to pay? Then there is the how. How are you going to do the work? Connectivity happens to the customers, providing magical customer experiences, oftentimes, as Nicolaj says, before the customer even realizes that they need something. But then, this delivery model is also addressing the question of how do you connect to the ecosystem and the value chain, making sure that you’re delivering value at an affordable efficiency or fulfillment cost.
Chaudhuri: So give us a few examples. It sounds very compelling, digital economy, new economy. Give us some examples of how companies are doing this.
Terwiesch: Let’s start with an example we use in the book, McGraw-Hill. As customers of McGraw-Hill, I’m sure, many of our listeners either in high school or college have gone through the textbooks from McGraw-Hill. If you think about those experiences in the old days as a student, you would have no connection to McGraw-Hill. The closest you would ever get was in the bookstore buying that $100 book. But otherwise, you and McGraw-Hill aren’t connected.
“I’m buying a shoe that has a chip embedded. … Nike now knows when I’m running and how I’m running.” – Nicolaj Siggelkow
If you think about the modern world, McGraw-Hill now tries to be a publisher of digital learning experiences. These books are now read in the cloud, on a mobile device or on a computer. That means that every time you open the book, there’s a connection that is established between the reader and McGraw-Hill that allows McGraw-Hill to create some fairly cool reading experiences that you just couldn’t deliver in the old paper publishing model.
You can think about situations where as a student, you recall these stupid questions at the end of the chapter. These chapter questions can be automatically graded. The algorithms that are doing the grading can route you back to chapters or sections of a chapter that you apparently didn’t understand. You could basically have some friendly gamification competition with other students in the class. Again, this good old book turns into a learning experience by moving away from episode to continuous connection.
Siggelkow: Yes. Another example would be a running shoe. You could say, “Well, how can I have a connected strategy with a shoe?” Indeed, the only connection, let’s say, Nike had with me was every one and a half years when I would buy a new pair of shoes. And then, it was not really a connection with me, but with Foot Locker. Because I would not buy directly from Nike. But nowadays, I’m not buying a shoe anymore.
I’m buying a shoe that has a chip embedded. That chip talks to my cell phone. That cell phone connects me to my virtual running club or maybe to a health coach. And all of a sudden, Nike has a daily interaction with me. Nike now knows when I’m running and how I’m running. There are two things that have happened. First of all, Nike now starts to learn more about me as a customer, and that might allow Nike to fulfill a deeper need that I have.
My need is not actually to run. My more fundamental need is that I want to finish my first marathon. And if Nike can now help me to accomplish that goal, that makes my willingness to pay much higher than for just buying a shoe. At the same time, how does Nike do this? Does Nike now have to integrate into every aspect of health and fitness? No. For certain things, yes, they do it themselves by still manufacturing shoes and selling them to me.
But the virtual running club, they just have to facilitate finding some other kindred spirits that I can connect with so that we can give each other daily updates on how much we have been running, or they have to connect me to another platform where there are some running coaches that can sell their services. So it’s, on the one hand, a much deeper relationship with the customer and then, on the other hand, given that I now know what you want, maybe I can connect you to other parties that will help you to fulfill that need.
Chaudhuri: It’s fascinating. I can see this coming alive. Like you mentioned, there are two facets. We’re focusing on the customer experience part of it now, and there’s, of course, the connected delivery part of it. Now, let’s take this a little bit further. The idea here is that I have a better relationship with my customer. One piece, like you said, is I understand them better. But the ultimate goal on this side is that I can increase, as you said, willingness to pay. So that’s what I get out of it as a Nike or a McGraw-Hill.
“You’re basically differentiating yourself in a way that you’re no longer competing head to head for every transaction.” – Christian Terwiesch
Siggelkow: Correct. We want to be careful not to confuse the willingness to pay and the actual price that the customer is paying. The willingness to pay is the value that the customer is seeing from that interaction. I think that is the key element of a connected customer experience or relationship. By understanding a customer more deeply, I understand what that customer’s paying points are. I understand those particular customers’ willingness-to-pay drivers.
I can start to craft a solution or a product around that particular customer. Moreover, I understand the deeper needs that this customer is trying to fulfill, and I can help that customer to do that as well. So that’s feeding the willingness-to-pay side.
Terwiesch: Where this comes really, this element of competitive advantage is — as Nicolaj and his dissertation advisor, Michael Porter, know better than anybody — that this whole notion of competitive advantage, you’re basically differentiating yourself in a way that you’re no longer competing head to head for every transaction, but the switching costs are there, you have so much stickiness on these platforms. Nike now has all the data. You’ve formed this trust, and you think twice before going and buying an Adidas shoe.
About Our Guests
Nicolaj Siggelkow is the David M. Knott Professor at the Wharton School, University of Pennsylvania. He is a Co-director of the Mack Institute for Innovation Management at Wharton. He studied Economics at Stanford University and earned an M.A. in Economics from Harvard University. He received a Ph.D. in Business Economics from Harvard University and the Harvard Business School. Siggelkow has been the recipient of multiple MBA and Undergraduate Excellence in Teaching Awards. His research has been published in the leading management journals, including Academy of Management Journal, Administrative Science Quarterly, Journal of Industrial Economics, Management Science, Organization Science, and Strategic Organization. In 2008, he received the Administrative Science Quarterly Scholarly Contribution Award for the most significant paper published in ASQ five years earlier. Siggelkow is a member of the Editorial Review Boards of Administrative Science Quarterly, Organization Science, Strategic Management Journal, Strategic Organization, and Academy of Management Perspectives. His current research focuses on the strategic and organizational implications of interactions among a firm’s choices of activities and resources.
Christian Terwiesch is the Andrew M. Heller Professor at the Wharton School of the University of Pennsylvania. He is a Professor in Wharton’s Operations and Information Management department, Co-director of Penn’s Mack Institute for Innovation Management, and also holds a faculty appointment in Penn’s Perelman School of Medicine. His research on Operations Management and on Innovation Management appears in many of the leading academic journals ranging from Management Science to The New England Journal of Medicine. He is an award-winning teacher with extensive experience in MBA teaching and executive education. Terwiesch is the co-author of Matching Supply with Demand, a widely used textbook in Operations Management that is now in its third edition. Based on this book, Terwiesch launched the first Massive Open Online Course (MOOC) in business on Coursera. His book, Innovation Tournaments, was published by Harvard Business School Press.
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