Connected Strategy

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HARVARD BUSINESS RE VIE W PRESS
BOSTON, MASSACHUSETTS
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CONNECTED
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STRATEGY
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Nicolaj Christian 21
Siggelkow Terwiesch 22
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Building 31
Continuous Customer Relationships 32

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for Competitive Advantage 34
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To my dad, who would have been 9
the proudest reader 10
(NS) 11
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To my parents, who taught me more about
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business than any school ever could
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(CT)
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CONTENTS 4
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Prologue: The Magic of Connected Strategy ix 10
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1 . The Connected Strategy Framework 1
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PART ONE
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T HE RE WARDS OF CONNEC T ED ST R AT EGIES
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2. Breaking the Trade-off between Superior 17
Customer Experience and Lowering Costs 21 18
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3. Workshop 1: 48 20
Using Connectivity to Provide Superior Customer 21
Experiences at Lower Costs 22
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PART T WO 24
CRE AT ING CONNEC T ED CUSTOMER REL AT IONSHIPS 25
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4. Recognize, Request, and Respond: 61
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Building Connected Customer Experiences
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5. Repeat: 89 29
Building Customer Relationships to 30
Create Competitive Advantage 31
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6. Workshop 2: 118
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Building Connected Customer Relationships
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viii Contents
1 PART T HREE
2 CRE AT ING CONNEC T ED DEL I VERY MODELS
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4 7. Designing Connection Architectures 145
5 8. Revenue Models for Connected Strategies 171
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7 9. Technology Infrastructure for
8 Connected Strategies 193
9 10. Workshop 3: 214
10 Building Your Connected Delivery Model
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13 Epilogue: Seizing the Connected Strategy Potential 231
14 Sources 235
15 Index 000
16 About the Authors and Acknowledgments 247
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PROLOGUE 4
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The Magic of 8
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Connected Strategy 10
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The practices of entertainment giant Disney illustrate a seismic shift 16
in how firms create competitive advantage through what we term con- 17
nected strategy. Firms with a connected strategy fundamentally change 18
how they interact with their customers and what connections they cre- 19
ate among the various players in their ecosystem. At its core, a connected 20
strategy transforms traditional, episodic interactions with customers 21
into connected customer relationships that are characterized by contin- 22
uous, low-friction, and personalized interactions. 23
For years, Disney has organized mini-camps for c hildren as part of 24
its cruise operations. Stressed-out parents on a Disney cruise can drop 25
off their kids for a few hours in order to get some private time on board. 26
Disney has always taken its responsibility for the c hildren in its care 27
seriously. Until 2005, this meant stopping camp activities every thirty 28
minutes for roll call, thus creating extra work for the staff and inter- 29
rupting the fun. In 2005, Disney began using monitors to track their 30
small campers—monitors originally developed in the medical field to 31
keep track of dementia patients who w
ere at risk of wandering off. The 32
children w
ere outfitted with little bracelets that identified them and 33
pinpointed their location within the ship. 34
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x Prologue
1 This was the starting point for a w

hole new Disney experience named
2 MagicPlus. With the ability to know the identity and location of every
3 guest, Disney soon asked how else it could use MagicPlus to enhance
4 the guest experience and improve operational efficiency.
5 The answers that emerged touched on a remarkably broad range
6 of its theme park operations. As part of its meet-and-greet program,
7 Disney characters routinely interact with young guests in the park.
8 Before MagicPlus, later renamed MagicBand, Disney’s cast members
9 posing as Mickey Mouse or Captain Jack Sparrow knew little about the
10 children. With the MagicBand, Mickey and the captain not only knew
11 each child’s name but were also aware of the family’s prior visits to Dis-
12 ney theme parks around the world. If six-year-old Sydney met Mickey
13 Mouse last year in Orlando and this year was at the Anaheim park,
14 Mickey would “remember” the first encounter, making the child’s expe-
15 rience truly magical.
16 Beyond creating enhanced customer experiences, the MagicBand
17 also improved park operations, thus reducing Disney’s costs—a truly
18 magical outcome from a business perspective. From tracking food
19 orders to h
andling guest complaints, from identifying each guest to
20 having access on a tablet to all their prior interactions with cast mem-
21 bers, efficiency was greatly improved. Moreover, the MagicBand al-
22 lowed guests to make reservations at busy attractions for predefined
23 time windows, slashing their wait times. This enabled Disney to direct
24 the stream of visitors and jump-start operations at the beginning of the
25 day, increasing the overall number of visitors that could be handled by
26 a theme park while maintaining a great visitor experience.
27 Connected strategies unfold in a rapidly changing environment.
28 Given its success, one would imagine that Disney would equip every park
29 with the MagicBand. But this is not the case. When Disney opened its
30 Shanghai Disney Resort, it decided against the move. It wasn’t that
31 the Chinese failed to appreciate the magic. Instead, by the time of the
32 park’s opening, a more efficient alternative had arrived, and almost
33 every visitor already had this magical technology in his or her pocket:
34 a smartphone. Equipped with the right apps, today’s phones offer
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Prologue xi
all the information and access to Disney that the MagicBand had 1
provided. 2
The common theme of the Disney story and many more case stud- 3
ies in this book is that we are living in a world where new forms of con- 4
nectivity are transforming the way companies do business. Connected 5
strategies allow you, as an executive, to create superior customer expe- 6
riences while simultaneously achieving dramatic improvements in op- 7
erational efficiencies. In short, connected strategies can substantially 8
relax the trade-off that firms have traditionally faced between provid- 9
ing superior customer experiences and lowering costs. Adopting con- 10
nected strategies allows firms to create a formidable competitive 11
advantage. Not surprisingly, their rapid rise is creating new winners 12
and losers in its wake. 13
The technologies behind connected strategies are improving at a diz- 14
zying speed. The world’s estimated three billion smartphones pack the 15
power of supercomputers from only a decade ago. The Internet of 16
Things enables instant communication among systems that couldn’t 17
talk to each other before. Wearable health and fitness trackers now 18
rival traditional medical devices in their accuracy. And recommenda- 19
tion systems driven by artificial intelligence deliver insights faster than 20
humans ever could. With all t hese advancements, magical user expe- 21
riences are coming to life in many industries. What is fascinating, how- 22
ever, is that the technology per se is usually relegated to a supporting 23
role. The key innovation of connected strategies lies in their revamping 24
of a firm’s business model. Consider the following four examples. 25
Amazon redefined how retailers interact with customers. U
ntil 26
recently, customers were forever making long shopping lists and driv- 27
ing to various stores. Now, they can tell Amazon’s Alexa to order food, 28
clothing, or just about anything e lse, and the products are delivered to 29
the customer’s house, sometimes within hours. Beyond Alexa, Ama- 30
zon also introduced the Dash Button, a small Wi-Fi device that cus- 31
tomers can attach to the refrigerator, washing machine, or bathroom 32
vanity and press to reorder bottled w
ater, detergent, toilet paper, and 33
much more. 34
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xii Prologue
1 College textbook publishing is also going through a fundamental

2 transformation. In the old days, students would buy or rent their text-
3 book, read the assigned chapters (or at least intend to do so), and then
4 prepare for their final exam by tackling a set of practice problems at
5 the end of each chapter. Now, McGraw-Hill Higher Education, for ex-
6 ample, has abandoned the word book and instead aims to sell digital
7 learning experiences. Not only are the books fully digital, they are also
8 smart. As students go through the semester, technology tracks their
9 reading and feeds the data back to the professor and the publisher.
10 When a student is struggling with an assignment, the book redirects
11 the student to the appropriate chapter and potentially offers a short
12 video message on how to handle a similar assignment. Each student
13 thus receives a curated and customized learning experience, rather
14 than a standard textbook, and textbook publishers are moving be-
15 yond their traditional role to become tutors as well.
16 Customers used to interact with Nike once a year to buy r unning
17 shoes, and that interaction was actually with a shoe retailer, not Nike.
18 Now, customers purchase a wellness system that includes a chip em-
19 bedded in the shoes, software that analyzes their latest workout, and
20 a social network with other Nike runners for support. Customers in-
21 teract daily with Nike, allowing the company to transform itself from
22 shoe manufacturer to purveyor of health and fitness services, and to
23 coach customers to achieve their goals.
24 Millions of consumers have embraced wearable technologies and let
25 devices such as Apple Watch or FitBit track their daily lives. Some ex-
26 treme users, also known as quantified selves, are measuring e very as-
27 pect of their bodies, from glucose levels to body weight to nutrition to
28 sleep cycles. When Apple knows more about a patient than her doc-
29 tor, this has major implications for the health care industry. Many dig-
30 ital delivery systems are integrating this data stream with the patient’s
31 electronic medical record. In the old days, patients and doctors would
32 see each other during periodic visits. Now, changes in body weight or
33 blood pressure and medication compliance are reported to the care
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Prologue xiii
provider daily, prompting timely action triggered by abnormalities 1

in the data feed. At the cutting edge, firms like Medtronic have 2
gone one step further. Some implanted devices not only track health 3
data and communicate it but are even smart enough to take action au- 4
tomatically when they detect abnormal patterns in clinically relevant 5
variables. 6
As you might have noticed, there are two common threads to these 7
developments. First, firms are fundamentally changing how they 8
connect with their customers. Rather than having episodic interactions, 9
firms are striving to be connected in a continuous way, providing 10
services and products as the needs of customers arise, sometimes even 11
before customers have become aware of their own needs. These firms 12
create a connected relationship with their customers. 13
Second, firms not only address a wider range of needs, they do it at 14
lower costs. For most of its business, Amazon d
oesn’t need expensive 15
retail outlets; the customized, artificial intelligence–based tutoring by 16
McGraw-Hill forgoes expensive instructors; the motivation to achieve 17
goals in Nike’s system is created by a peer-based network, not personal 18
trainers; and the implanted medical devices that automatically take ac- 19
tion also save money by avoiding hospitalizations. The potential of con- 20
nected strategies is to create customer experiences that feel like magic 21
while improving operational efficiency to enhance financial success. 22
Given their tremendous potential, connected strategies create great 23
opportunities for you—but also for all of your current and f uture com- 24
petitors! Connected strategies w
ill lead to disruption in many indus- 25
tries. At a time when a mobility platform is valued more than some of 26
the biggest car companies in the world, increases in connectivity can 27
often be seen more as a threat than an opportunity. But, in almost any 28
industry, potentially disruptive threats come and go, and at any given 29
moment you might fear disruption from a dozen different new ven- 30
tures. Which ventures w
ill survive? Which ones are truly disruptive? 31
We hope that the frameworks and tools in this book w
ill not only help 32
you in creating your own connected strategy but also provide you with 33
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xiv Prologue
1 a new perspective, allowing you to separate technological hype from

2 true strategic challenges.
3 What is a connected strategy? What tools and frameworks can you
4 use to build one for your organization? How does it help you create
5 a competitive advantage? What are g
reat examples to learn from?
6 Answers to t hese questions are at the heart of this book.
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The Connected 8
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Strategy Framework 10
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A good way to start understanding connected strategy is to consider 16
the traditional relationship between customers and companies. Tradi- 17
tional interactions start when customers realize they have an unmet 18
need. This need could be the desire to see Mickey Mouse and r ide a 19
roller coaster, the dream of mastering financial accounting, or the urge 20
to get into shape before summer arrives. Customers then figure out 21
how they want to fulfill this need. They browse theme parks on Expe- 22
dia, they look for accounting books at Barnes & Noble, or they consult 23
with friends or the local gym on how to train for a triathlon. 24
At some point, customers attain a level of knowledge that sparks ac- 25
tion to put some money on the table. They book a ticket to Disneyland, 26
they buy an expensive textbook, or they sign up for a weeklong training 27
camp. But t here is considerable friction in the traditional transaction: 28
customers spend a significant amount of effort to search, request, and 29
receive the product or service they desire. 30
Firms sit on the other end of these traditional transactions. Yes, they 31
can use marketing dollars to influence the customer along the journey 32
to place an order, but they have limited connections to that customer. 33
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2 The Connected Strategy Framework
1 Their episodic interactions start only once the customer has placed
2 an order, and they end on delivery of the product.
3 In traditional interactions, firms work hard to provide high-quality
4 products and services as quickly as possible and at a competitive cost.
5 They manage and perfect their marketing and operations within the
6 model of episodic sales, but they are inherently limited by the lack of
7 deep connections with their customers. Traditional episodic interac-
8 tions between customers and firms usually require customers to invest
9 significant effort in figuring out a solution to their needs, then re-
10 questing and receiving the product or service. Moreover, there often
11 exists a gap between what the customer wants and what the firm pro-
12 vides. This gap can be a temporal gap (the customer must wait), or a
13 gap between what the customer really wants and what the firm has to
14 offer.
15 A firm that is able to move from episodic interactions with its cus-
16 tomers to a connected relationship overcomes these shortfalls. Con-
17 sider again the power of the MagicBand. Disney used to have only a
18 handful of interactions with its visitors, and those happened at well-
19 defined intervals—when they came to the park and bought a ticket,
20 or when they ordered cheeseburgers at the restaurant. Now, sensors
21 track the guests via their MagicBand e very step and e very second. The
22 MagicBand not only reduces the effort in ordering and receiving
23 cheeseburgers or souvenirs, it tailors the experience by making sugges-
24 tions to the visitor.
25 Similarly, McGraw-Hill originally interacted with a reader only
26 when selling a book, and even that connection was delegated to a re-
27 tailer, similar to the case of Nike. But t oday, e very time the reader looks
28 at the book or tackles a practice problem, a connection is established
29 that allows the publisher to learn about the reader, curate its offering,
30 and coach the student when he or she is stuck. Meanwhile, in health
31 care, the connected strategy moves the doctor-patient relationship from
32 an episodic encounter every few months to a continuous flow of data
33 from the patient to the care team, enabling medical needs to be ad-
34 dressed before they become severe.
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The Connected Strategy Framework 3
Moving away from episodic interactions toward a connected rela- 1

tionship turns a theme park into a magical experience, transforms a 2
book publisher into a creator of learning journeys, and revamps a hos- 3
pital system into a proactive care organization. Such deeply connected 4
relationships create more loyalty and higher profits. 5
Connected strategies don’t just happen; they need to be carefully 6
designed. They have two key elements: a connected customer relationship 7
and a connected delivery model. The connected customer relationship is 8
what delights the customer. The connected delivery model is what 9
allows the firm to create these relationships at low cost. Each con- 10
nected customer relationship and delivery model is the result of strate- 11
gic choices along several design dimensions. Let’s look at these in 12
figure 1-1. 13
At the heart of the connected strategy is the connected relationship 14
between customers and a firm. We find it helpful to think about four 15
design dimensions of a connected customer relationship, which we w
ill 16
refer to as the four Rs of connected relationships. First, the informa- 17
tion that flows from the customer to the firm allows e ither party to rec- 18
ognize a customer need. Once a need is recognized, the customer or 19
firm identifies a product or service that would satisfy this need, lead- 20
ing to a request for a desired option. In turn, this triggers the firm 21
to respond, creating a customized, low-f riction customer experience. 22
By interacting with customers frequently, a firm is able to repeat the 23
24
FIGURE 1-1 25
26
The connected strategy framework
27
Connected strategy 28
Connected customer relationship Connected delivery model 29
Recognize Request Respond Connection architecture 30
31
Revenue model
32
Repeat Technology infrastructure
33
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1 interactions with its customers, allowing it to continually refine the cycle

2 of recognize-request-respond and to convert episodic interactions into
3 a true relationship with its customers.
4 To create connected customer relationships in a cost-efficient way,
5 a firm needs to create a connected delivery model. The delivery model is
6 the result of three key strategic decisions. First, the firm has to decide
7 whom to connect with whom in its ecosystem. What connections need
8 to be created between and among its suppliers, its customers, and itself?
9 We call this the connection architecture. Second, the firm has to decide
10 how money w
ill flow through this architecture, allowing it to monetize
11 the value that results from breaking the trade-off between customer
12 happiness and efficiency: it has to design a revenue model. Lastly, the
13 firm has to make a range of technological choices that facilitate all
14 the elements of a connected strategy. It has to decide on its technology
15 infrastructure.
16 This book is designed to help you both understand and create con-
17 nected strategies for your own organization. We have structured the
18 book into three parts. In part I, we show in detail how connected strate-
19 gies allow you to break your existing trade-off between customer happi-
20 ness and efficiency. Part II helps you understand how to build
21 connected customer relationships. Finally, in part III, we describe how
22 to build a connected delivery model. Each part concludes with a chap-
23 ter we call a workshop. In these workshops, we offer exercises that have
24 been tested and refined with executive education audiences. These
25 workshops will help you assess your firm’s current activities and create
26 your own connected strategy.
27 To provide you with a road map of what lies ahead, h
ere is a brief
28 preview.
29
30
31 Part I: The Rewards of Connected Strategies
32
33 In chapter 2, “Breaking the Trade-off between Superior Customer
34 Experience and Lowering Costs,” we discuss several case studies that
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illustrate how connected strategies can overcome the trade-off between 1

customer happiness and efficiency—a trade-off that is foundational to 2
most traditional strategic planning frameworks. By tracking guests 3
in a theme park, selling smart books, and taking care of patients’ health 4
rather than thinking of them as appointment slots, a connected strat- 5
egy creates value by breaking the existing trade-offs between the value 6
that a customer receives and the cost that the firm incurs. The reward 7
of a connected strategy is providing more value to the customer at a 8
lower cost to the firm. 9
We explain how current innovations in the grocery retail sector, 10
including meal-kit delivery services, augmented reality displays, and 11
stores without checkout lines, are increasing both customer satisfaction 12
and efficiencies. 13
Using a detailed case study of the ride-hailing industry, we then dis- 14
cuss how firms such as Uber and Lyft not only have improved the pas- 15
senger experience compared with cab companies but are able to do this 16
at much lower fulfillment costs. By connecting passengers with drivers, 17
ride-hailing companies have created a market for driving services. Fur- 18
ther, by allowing prices to vary depending on supply and demand, 19
drivers are given an incentive to work when and where it is most valu- 20
able. Matching supply with demand in a dynamic world requires new 21
forms of connectivity that extend well beyond a person jumping into 22
the street to flag a cab or calling a grumpy dispatcher to send a taxi. 23
Once that connectivity is put in place, resources can be used much 24
more efficiently. 25
We finish the chapter by discussing how connected strategies can 26
lead to competitive advantage and by reflecting on the importance of 27
data privacy in the context of connected strategies. 28
Chapter 3, titled “Workshop 1: Using Connectivity to Provide Supe- 29
rior Customer Experiences at Lower Costs,” contains a series of work- 30
sheets that will start you on the process of creating a connected strategy 31
for your organization. 32
33
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1
2 Part II: Creating Connected
3 Customer Relationships
4
5 In part II of the book, we analyze in depth how you can create a con-
6 nected relationship with your customers—a relationship in which epi-
7 sodic interactions are replaced by frequent, low-friction, and customized
8 interactions enabled by rich data exchange.
9 In chapter 4, “Recognize, Request, and Respond: Building Connected
10 Customer Experiences,” we investigate the first three design dimen-
11 sions of a connected relationship. The dimension of recognize encapsu-
12 lates the information flow between the customer and firm that leads
13 to the recognition of a customer need. We discuss various ways in which
14 you can shape this information flow: this flow might be initiated by
15 the customer, or it might be autonomous. Once the information reaches
16 the firm, the firm needs to interpret and convert it (or help the
17 customer to convert it) into a request for a desired option. Lastly, the
18 firm needs to respond to this request and fulfill the desired option in a
19 low-friction manner. This full interaction between customer and firm
20 creates a connected customer experience. Through our research, we
21 have identified four different types of connected customer experi-
22 ences. T
hese are as follows:
23
24 Respond-to-desire
25 Curated offering
26
27 Coach behavior
28 Automatic execution
29
30 Let’s take a look at each, returning to our examples from the pro-
31 logue. Amazon is a great case of what we call a respond-to-desire connected
32 customer experience. Once the customer expresses a need, Amazon
33 responds rapidly and conveniently. At Disney, a key function of the
34
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MagicBand is to create a respond-to-desire experience. When a cus- 1

tomer wants to enter a r ide, pay for a cheeseburger, or open her h
otel 2
room, a swipe with the MagicBand is all that is needed. 3
The McGraw-Hill textbook example illustrates curated offering. Hav- 4
ing many interactions with each customer allows the firm to learn about 5
the customer’s needs. With that knowledge and trust, the customer is 6
no longer alone in finding solutions. H
ere, the firm and the customer 7
look for solutions jointly. McGraw-Hill does not just help the student 8
figure out the corporate valuation problem on page 247, but instead 9
detects that the student is still struggling with net present value calcu- 10
lations and asks him to repeat the content on page 35. 11
Companies that create connected strategies often create more than 12
one connected customer experience. Returning to our Disney exam- 13
ple, it’s clear that the MagicBand does more than create a respond-to- 14
desire experience. With the MagicBand, the customer can communicate 15
a decision that she no longer wants to take a ride on Magic Mountain. 16
Instead, she tells Disney (or Disney knows from past experience) that 17
she wants to experience an action r ide and a yummy meal in the next 18
two hours. Disney then takes this information and creates a personal- 19
ized itinerary. Moreover, Disney is even able to customize the experi- 20
ence of different rides. For instance, if a visitor has created an avatar in 21
one of Disney’s video games, this avatar will appear on the “Wanted” 22
poster that the visitor sees during the Pirates of the Caribbean ride. 23
We call the third type of connected customer experience coach be 24
havior. Firms like Nike try to change the behavior of customers toward 25
what is good, smart, or healthy. Nike does not force you to go running 26
more often, but it can offer to help you achieve your fitness and health 27
goals. Similarly, the virtual tutor in a smart textbook says, “Jeremy, you 28
have not yet completed the assigned readings for this week,” just as a 29
wearable device starts vibrating if its owner has not left his office chair 30
for the last few hours. 31
Connected devices that let health care providers intervene even 32
before an urgent need has arisen and implanted devices that are able 33
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1 to take independent actions are examples of the automatic execution

2 connected customer experience. A cardiologist is consulted the moment
3 an arrhythmia is recorded by the heart-rate monitor. A digital photo
4 album is created and sent to the customer based on many shots taken
5 in the theme park, all done without the customer ever noticing a cam-
6 era. As with many connected strategies, these deep connections can
7 raise privacy issues, as they sit in a gray zone between Big B
rother and
8 parental love. We will explore these issues throughout the book. And,
9 just to be clear, we d
on’t see this as the vision for all connected cus-
10 tomer experiences, though most of our students would happily permit
11 textbooks to take their exams for them . . .
12 While t hese individual customer experiences already create a lot of
13 value, once a firm is able to repeat these interactions, it has the ability
14 to substantially refine the customer experience over time. A firm with
15 a connected strategy is able to transform a series of customer experi-
16 ences into a connected relationship with its customers—a key condition
17 for a firm to create a competitive advantage. This transformation is the
18 topic of chapter 5, “Repeat: Building Customer Relationships to Cre-
19 ate Competitive Advantage.”
20 We believe that many connected customer experiences w
ill become
21 table stakes in the future. That is why the repeat dimension is so impor
22 tant. It is through this dimension—the ability of firms to learn from
23 existing interactions in order to shape future interactions—that firms
24 will be able to create a sustainable competitive advantage. The repeat
25 dimension helps firms with two forms of learning.
26 First, at the level of a particular customer, a firm learns how to bet-
27 ter match the needs of this customer with the firm’s existing products
28 and services. Disney learns that Jing seems to like ice cream more than
29 fries and theater performances more than rides, so it is able to create
30 a more enjoyable itinerary for her. McGraw-Hill learns that Jeremy
31 struggles with compound-interest calculations, and is able to direct his
32 attention to material that covers exactly that weakness. Netflix learns
33 that Venkat likes political satire, and can make more pertinent sug-
34 gestions to him of what movies he would enjoy.
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Second, beyond this customer-specific learning, the firm can engage 1

in population-level learning, allowing it to adjust its existing portfo- 2
lio of products and services. Disney learns that the general demand for 3
frozen yogurt is increasing, so it can add more stands serving frozen yo- 4
gurt. McGraw-Hill learns that many students struggle with compound- 5
interest calculations, so it refines its online module on this topic. Netflix 6
observes that many viewers like political dramas, so it licenses addi- 7
tional series in this genre. Moreover, population-level learning may 8
allow a firm to know more about its customers than any of its suppli- 9
ers do, thereby enabling it to create new products and services. Hav- 10
ing deeper customer insight allows McGraw-Hill’s content producers 11
to add new educational experiences, and Netflix to move into movie 12
production itself. 13
Over time, these two levels of learning have another very important 14
effect: firms are able to address more fundamental needs of custom- 15
ers. McGraw-Hill might learn that its customer wants not just to learn 16
financial accounting but in fact to make a c areer on Wall Street. Nike 17
might find out that a particular runner is interested not just in keep- 18
ing fit but also in training to run a first marathon. This knowledge 19
can lead to opportunities to create an even wider range of services and 20
to trust relationships between firms and customers that become very 21
hard to break by competitors. To build these trusted relationships, cus- 22
tomer data needs to be used in transparent and secure ways, a topic 23
we return to at the end of chapter 5. 24
Chapter 6, “Workshop 2: Building Connected Customer Rela- 25
tionships,” concludes part II of the book by guiding you through a 26
series of exercises that w
ill assist you in creating connected customer 27
relationships. 28
29
30
Part III: Creating Connected Delivery Models 31
32
Once you have an idea of the type of connected relationship you want 33
to design for your customers, the question is how to implement this 34
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1
2
3
4 HOW THIS BOOK CAME TO BE
5
6 At the Wharton School, both of us teach in the MBA and executive educa-
7 tion programs, and we are codirectors of the Mack Institute for Innovation
8 Management. In the last few years, as new and existing firms disrupted their
9 industries by fundamentally changing how they connect with their custom-
10 ers, we have begun to think about the principles underlying their suc-
11 cess. At the same time, more and more managers have come to Wharton
12 Executive Education to learn how to create opportunities for their own
13 businesses using these principles. As a result, we set out both to help
14 managers navigate the world of the Internet of Things, the sharing econ-
15 omy, platform strategies, deep learning, fintech (financial technology), and
16 so on, and to provide them with a tool kit to create connected strategies
17 for their own organizations. Our thinking was sharpened and refined
18 through hundreds of sessions with executives and MBA students. The
19 stories they shared of their own experiences and challenges were essen-
20 tial feedback as we developed the framework we now call connected
21
22
23
24 relationship in a cost-effective way. You need to create a connected
25 delivery model. These models consist of three parts, which form the
26 subjects of the next three chapters.
27 In chapter 7, “Designing Connection Architectures,” we lay out dif
28 ferent ways in which firms can reshape the network of connections
29 among the various players in their ecosystems. Ride-hailing firms such
30 as Uber and Lyft have created connections between previously uncon-
31 nected parties: individuals with cars and individuals looking for a
32 ride. Such a configuration of the value chain has its advantages, but
33 there are many alternatives. In the world of mobility, Daimler has deci
34 ded to create its own car-sharing service (Car2Go), forming a direct
588-77183_ch01_1P.indd 10 08/01/19 12:42 PM

1
2
strategy. The book you hold in your hands (or read on the screen) is the 3
result. 4
As in any research, we have stood on the shoulders of g iants. We have 5
greatly benefited from the broad-ranging research by Michael E. Porter, who 6
has investigated the impact of the internet and new technologies on strat- 7
egy for a long time. The work by Adam M. Brandenburger, Harborne W. 8
Stuart Jr., and Barry J. Nalebuff had an important influence on our discus- 9
sion of value and willingness-to-pay in chapter 2, while the customer jour- 10
ney we discuss in chapter 4 has its intellectual foundation in the work by 11
Ian C. McMillan and Rita Gunther McGrath. The insightful work by Andrew 12
McAfee and Erik Brynjolfsson on the impact of new technologies on firms 13
and society has always been stimulating for us. Finally, we have been 14
inspired by our friends, colleagues, and coauthors David Asch and Kevin 15
Volpp, whose pioneering work on hovering over patients while outside the 16
hospital has influenced our thinking on connected customer relationships. 17
Obviously, many others have influenced our thinking and work. For readers 18
who would like to dive deeper into the related academic and applied liter 19
ature, we have compiled a detailed sources section at the end of the book. 20
21
22
23
connection between a manufacturer and customers. In contrast, Zip- 24
car, another car-sharing operation, has connections to both car manu- 25
facturers and renters, as it has to purchase cars before it can rent 26
them out. Finally, ride-sharing service BlaBlaCar operates a peer-to- 27
peer network of drivers who offer each other rides whenever an empty 28
seat is available. 29
When implementing a connected strategy, you need to decide how 30
much of the customer experience your firm w
ill generate internally 31
and how much you will delegate to other partners in the ecosystem. 32
Moreover, you may have to create new connections between players in 33
your ecosystem. Chapter 7 provides guidance on these decisions. As 34
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1
2
3
4 CONNEC TED STR ATEGY VERSUS
5 PL ATFORM STRATEGY
6
7 The last couple of years have witnessed an enormous success of so-called
8 platform strategies. Connected strategies are different from platform strate-
9 gies; in fact, you can create value with connected strategies without
10 being a platform.
11 Platform businesses are not directly involved in serving customers by
12 providing them with goods or services. Instead, their focus is on connecting
13 the producers and customers of such products or services. For example,
14 Uber does not own cars. It connects drivers and their cars with passengers
15 who want a ride. Apple’s app store primarily does not sell Apple software.
16 It connects app developers and their software with customers who want to
17 use it. Rather than owning real estate, Airbnb focuses on connecting folks
18 who have empty rooms, apartments, or houses with travelers in need.
19 A platform r eally serves two sets of customers. First are t hose who pro-
20 vide the products or services that are transacted on the platform, be it
21 app developers, drivers, or landlords. And second are those who consume
22 those products or services, such as o wners of smartphones, passengers,
23 and travelers. Platform businesses need to appeal to both sets, which is
24 why they are often called two-sided markets. Success is typically achieved
25 by providing a platform for payment, trust building, and dispute resolu-
26 tion and by providing liquidity to the market, making sure t here are enough
27 customers to make it worth the providers’ effort to join the platform and
28 vice versa.
29 Though platforms crucially depend on connectivity and are an important
30 design element of our connected strategy framework, they differ along the
31 following important dimensions:
32
• Platforms are a particular type of what we call connection archi-
33
tecture. Connected strategy, however, also involves creating a con-
34
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1
2
nected customer relationship. For instance, Disney has created 3
strongly connected relationships with its customers, but most 4
of us would not refer to Disney as a platform. 5
6
• With the success (and hype) around platforms, the term has unfor-
7
tunately become rather diffuse and is applied to many different
8
models. As we will see in chapter 5, platform is really an umbrella
9
term for several different connection architectures. When Amazon,
10
a platform company, sells through its own warehouses, billions of
11
dollars of fixed assets in real estate, buildings, and logistics are in-
12
volved. When Amazon facilitates a sale through its Marketplace
13
platform, none of these assets is involved. These are very different
14
business models! Similarly, while Airbnb and Facebook are both
15
platforms, one is connecting customers to individuals who serve as
16
suppliers (of accommodation), whereas the other connects individ-
17
uals who do not engage in a business transaction. Again, these
18
are very different connection architectures that w
ill require, for
19
instance, very different revenue models.
20
• On most platforms, the relationship between customers and pro- 21
viders is primarily a transactional one, and the revenue model 22
of the platform is to take a cut from these transactions. In contrast, 23
the ultimate goal of connected strategies is to transform episodic 24
transactions into long-term customer relationships precisely to 25
avoid transactional pricing. 26
27
In sum, platforms and platform strategies are related to connected
28
strategies and also can be an element of a connected strategy. Yet connec-
29
tivity allows for many other forms of value creation than the formation of
30
two-sided markets, and it is the aim of a connected strategy to take ad-
31
vantage of them.
32
33
34
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1 we w
ill see, there are five common connection architectures that are
2 used across industries:
3
Connected producer
4
5 Connected retailer
6
Connected market maker
7
8 Crowd orchestrator
9
Peer-to-peer network creator
10
11 In chapter 7, we will describe each of these connection architectures
12 in detail. By recognizing these, you can make the right choices for your
13 business.
14 We finish the chapter by introducing the connected strategy matrix.
15 We have found this matrix to be a very valuable framework for sys-
16 tematically cataloging the various activities of your competitors in your
17 industry, as well as an innovation tool to create new ideas for your own
18 connected strategy.
19 Chapter 8, “Revenue Models for Connected Strategies,” adds the sec-
20 ond design consideration for your connected delivery model: the reve-
21 nue model. Some connected strategies can rely on traditional revenue
22 models. Disney, in its theme park division, is still making most of its
23 money from admission tickets, food, merchandise, and fees for special
24 experiences inside the park. Contrast this with Niantic and Nintendo,
25 two companies that also produce amazing experiences centered on
26 fictitious characters. With Pokémon Go, the partners have leveraged
27 augmented reality to create a technology platform that turns any place
28 into a virtual theme park. You can play it anywhere, anytime, and you
29 can play it for free, together with its other sixty-five million active
30 users. Niantic creates revenues through in-app purchases that en-
31 hance the game and through sponsorships by firms that create desir-
32 able locations for the game (e.g., Starbucks and McDonald’s).
33 Technological advances are often what make connected strategies
34 economically feasible. Of course, everyone would like to have person-
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alized, on-demand services that fulfill the most fundamental needs. 1

But how can firms offer such customized services at affordable prices? 2
Vast improvements along many dimensions, from data gathering, data 3
transmission, and data storage to data analysis, logistics, and manu- 4
facturing, have made connected strategies a possibility. In chapter 9, 5
“Technology Infrastructure for Connected Strategies,” we w
ill help you 6
sift through t hese advances. By coming back to the connected relation- 7
ships that you have designed in part II, we can identify key technolo- 8
gies and systematically ask which of these technologies will enable 9
you to further advance your connected strategy. 10
Finally, chapter 10, “Workshop 3: Building Your Connected Deliv- 11
ery Model,” presents a series of exercises and tools that will allow you 12
not only to build your own connected strategy but also to get a better 13
understanding of what is happening around you in your industry. 14
The concepts just introduced allow us now to formally define a con- 15
nected strategy: 16
17
A firm’s connected strategy is a set of operational and technological 18
choices that fundamentally changes 19
20
• how the firm connects to its customers by implementing 21
the recognize-request-respond-repeat loop, which transforms 22
episodic interactions into continuous relationships with low fric- 23
tion and high degree of customization, and 24
25
• what connections the firm creates among the various players
26
in its ecosystem through the type of connection architecture
27
it chooses and the subsequent economic value captured
28
through a revenue model.
29
30
31
32
33
34
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1
2 BUSINESS-T O-B USINESS
3 CONNEC TED STR ATEGIES
4
5 Connected strategies are arising in both business-
to-
consumer and
6 business-
to-
business settings. Consider Rolls-
Royce’s transition from a
7 simple seller of aircraft engines to a much broader service provider enabled
8 by deeper connectivity. Today’s aircraft engines are packed with sensors
9 that generate gigabytes of data. This data allows Rolls-Royce to have a pre-
10 cise understanding at the level of individual parts within an engine. While
11 previously parts such as a fuel pump would be replaced on a fixed sched-
12 ule, now Rolls-Royce can replace pumps earlier or later depending on the
13 state of the pump. This creates significant cost savings either by avoid-
14 ing engine problems and subsequent flight delays (if a pump was previ-
15 ously replaced too late) or by being able to use a pump longer than
16 normally. The ability to deliver preventative maintenance has allowed
17 Rolls-Royce to change its revenue model from selling engines to selling
18 flying hours, aligning incentives between itself and its customers. More-
19 over, when engines are decommissioned and returned, Rolls-Royce knows
20 the exact performance profile of each part and is able to recover 50 percent
21 of the materials to remanufacture them for use as new components, re-
22 ducing manufacturing costs. Being able to aggregate data across a cus-
23 tomer’s fleet allows Rolls-Royce to gain further insights. For instance, a
24 clean engine burns less fuel, but washing engines is costly. Using fleet-
25 level data, Rolls-Royce is able to determine the optimum time for each
26 engine in a fleet to get washed. Finally, by adding additional data sources
27 such as technical logs, flight plans, forecasts, and actual weather data,
28 Rolls-Royce is able to provide insights to its customers for how to in-
29 crease fuel efficiency—for instance, through improved flight schedules.
30 Through its connected strategy, Rolls-Royce has increased the value it
31 delivers to its customers while at the same time increasing its own
32 efficiency.
33
34
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1
How to Use This Book 2
3
You probably are reading this book not just for your entertainment 4
but rather with the intent of reflecting on how your organization cre- 5
ates connections to your customers and suppliers. We get it. That’s why 6
we wrote this book neither as an academic textbook nor as a scholarly 7
treatise. The main purpose of our writing is to help you design your 8
own connected strategy so that you can create a competitive advantage 9
for your firm. 10
At the end of each part of this book, we want to pause and help you 11
apply all the frameworks in the form of a workshop. Each workshop 12
consists of worksheets and guiding questions that we have road-tested 13
with a large number of our executive education participants. Use them 14
on your own, or even better, use them to engage your team members 15
and other stakeholders in a structured workshop. 16
On the website for this book, connected-strategy.com, you can find 17
more information on how to run your own workshop. The site has sug- 18
gested timelines for the workshops, as well as downloadable templates 19
of all exercises and group assignments. We also provide you with a 20
number of filled-out examples for the worksheets that will be useful 21
as you apply the tools we present in this book. Lastly, the website hosts 22
dozens of podcasts featuring executives from a wide array of industries, 23
from consulting to education and from banking to security services. 24
To illustrate our ideas and frameworks in this book, we use many 25
examples from firms around the world. Some of these examples will 26
hopefully spark ideas for your own organization. At the same time, we 27
want to be clear about one thing: we certainly do not expect all the 28
firms we mention to emerge as winners in their industries. Frankly, 29
we would be extremely surprised if they did. The world of connected 30
strategy is developing, and many new winners and losers w
ill be cre- 31
ated. We believe in the power of the ideas we present in this book, but 32
we are not offering investment tips for particular firms. 33
34
588-77183_ch01_1P.indd 17 08/01/19 12:42 PM

1 Whether you are a startup trying to disrupt an existing industry,

2 or an incumbent firm that wants to revitalize its strategy and defend
3 its business, w
hether you deal directly with end customers, or are in a
4 business-to-business setting, we believe connected strategies will play
5 a pivotal role in helping you achieve competitive advantage. If you d
on’t
6 think about connected strategies, someone else in your industry most
7 likely will!
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
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Continuous Customer Relationships 32

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16 For details and discount information for both print and

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1 This was the starting point for a w

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588-77183_ch00_1P.indd 11 08/01/19 12:42 PM

1 College textbook publishing is also ­going through a fundamental

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provider daily, prompting timely action triggered by abnormalities 1

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1 a new perspective, allowing you to separate technological hype from

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588-77183_ch01_1P.indd 1 08/01/19 12:42 PM

588-77183_ch01_1P.indd 2 08/01/19 12:42 PM

Moving away from episodic interactions ­toward a connected rela- 1

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1 interactions with its customers, allowing it to continually refine the cycle

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illustrate how connected strategies can overcome the trade-­off between 1

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588-77183_ch01_1P.indd 6 08/01/19 12:42 PM

MagicBand is to create a respond-­to-­desire experience. When a cus- 1

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1 to take in­de­pen­dent actions are examples of the automatic execution

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Second, beyond this customer-­specific learning, the firm can engage 1

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alized, on-­demand ser­vices that fulfill the most fundamental needs. 1

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588-77183_ch01_1P.indd 16 08/01/19 12:42 PM

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1 ­Whether you are a startup trying to disrupt an existing industry,

588-77183_ch01_1P.indd 18 08/01/19 12:42 PM

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