Nicolaj Siggelkow: [0:06] I think tremendous opportunities await for connected strategies, but there's huge trust issue between customers and companies. It's one thing if I order a book on Amazon, I need a certain amount of trust that this will happen, but there's something else about sharing my personal health data or my financial data.

Dan Saks: [0:27] That's Nicolaj Siggelkow, professor at the Wharton School and co‑author of "Connected Strategy ‑‑ Building Continuous Customer Relationships for Competitive Advantage." Nicolaj is the expert in the connected strategy revolution that sweeping the way businesses sell.

Instead of one‑off transactions, it's all about creating relationships. Companies now need to learn what customers like, what they don't like, and anticipate their needs. They need to be always on and always connected. Whether you think these connections are amazing, unnerving, or a little bit of both, the fact is they're becoming a vital part of the digital economy.

Nicolaj delivered one of the most popular keynotes about connected strategy at our annual Digital Economy Summit. Today, I'm excited for you to hear Nikolai explain how these strategies work and why trust is an essential ingredient to making them successful.

This is Daniel Saks, co‑CEO of AppDirect, and it's time to decode connected strategies. Welcome to "Decoding Digital," a podcast for innovators looking to thrive in the digital economy. I'm your host, Daniel Saks. I'll sit down with other founders, CEOs and changemakers to decode the trends that are transforming the way we work. Let's decode.

Dan: [2:12] How did you become a professor? Did you just wake up in the morning one day as a kid to say, "I'm going to write a book and become a professor?"

Nicolaj: [2:19] Almost. [laughs] It was doing my undergraduate time at Stanford that I had always in my mind, "I wanted to come go into business."

Maybe, this teaching profession sounds really interesting because that allows you to do so many different things. It allows you to research, interact with students, interact with executives, and so it was that package that I found really being a business school professor is being such an interesting idea. I started to pursue that idea.

Dan: [2:52] From having the idea of being a professor to becoming a professor, what were some of the challenges and hurdles you had, and how did you overcome them?

Nicolaj: [2:58] The long path [laughs] in between, there's something called a PhD. I graduated from Stanford with an economics degree. Then, I applied to both Economics Program and Business Economics Program. I was very fortunate to get into the Business Economics Program at Harvard.

[3:17] Again, part of that journey there was I was able to work with Mike Porter, who became my thesis advisor. That was certainly inspiring to really dig deep into the field of strategy. 22 years ago, I joined the faculty of Wharton and have been teaching and researching strategy ever since.

Dan: [3:37] Tell the audience about Mike Porter and some of the lessons you learned from him?

Nicolaj: [3:42] Mike was always an amazing, inspiring person for me. If you're a graduate student, the main role of your advisors is to tell you how stupid you are, and that's OK. [laughs] Going to Mike and talking to Mike is always very inspirational. Mike is just unsurpassed and being able to see patterns out there and synthesizing those patterns.

It was a privilege to work with him for a couple of years while being there. Actually, we continued working together after that as well.

Dan: [4:18] How do you think about identifying patterns? Is it looking at data? Is it objective research? Is it interviews? What do you find helps you connect the dots?

Nicolaj: [4:26] It's probably all of that. I think this is a nice lead into our topic of connected strategy because it was something that both Christian and I...This is a project together with my colleague, Christian Terwiesch, from the operations department at Wharton through our work, our teaching, our work with companies.

Both of us are co‑directors of the Mack Institute for Innovation Management. We got contact with executives in the innovation world. We saw a very common pattern emerge of lots of organizations really redefining of how they wanted to interact with their customers. To us, the interesting thing was we saw that across a whole bunch of industries.

The idea that rather than waiting for a customer to come to you with a need ‑‑ and then we responded to that ‑‑ why can't we have a continuous connection to our customer that may allow us to potentially anticipate the needs of that customer to be even aware of needs that customers might have, might develop before the customer is even aware of that need?

To have many more smaller interactions with customers over time than rather than having few big episodic interactions.

Dan: [5:39] What's an example of a company that does that really well?

Nicolaj: [5:42] No one I think is doing it really well yet. [laughs] In part, this is the exciting thing about delving into this topic because I think we're just seeing it emerging. The opportunities right are amazingly big.

Of course, companies like Amazon are making quite some headways of becoming more and more embedded in our lives and learning more and more about us and being able to anticipate needs and remove pain points from our lives.

One arena that I think that becomes currently very clear where there's tremendous potential is healthcare. That was the use case that originally inspired us to think about this because healthcare right now really works on the model of, we wait until something really catastrophic happens to you. Then, you go to see a doctor or go into a hospital.

While you're in the hospital, you are completely connected 24/7. All the attention is on you, but then someone decides, "OK, now you're well enough," and then they basically kick you out of the hospital. Practically, you're completely unconnected again, until something catastrophic happens to you. Then, you get readmitted.

Just talking about it like that, I think, makes it clear that this cannot be efficient, either for me as a patient or for the healthcare system. To us, what made us so excited about this topic of connected strategy was that we saw again and again that these connected strategies allowed not just to have a better customer experience but, at the same time, also increase efficiency.

It was really a win‑win. It was not one benefit on the expense of someone else, but it was creating a new model that creates so much more value and that can then basically divided between the organization that offers that strategy and the consumer, the customer, the client, the patient, whoever's on the other side, who's getting the benefit of a better experience.

Dan: [7:42] How do you define connected strategy, and how does it contrast with, let's just say, digital transformation?

Nicolaj: [7:47] Again, for us, a connected strategy has two big parts to it. On the one hand is what we'd call the connected customer relationship. We can talk more deeply about that. That is basically how a firm is able to more deeply connect to a customer. There are various ways of how our company can do that and trying to eliminate some pain points that a customer currently has.

On the other hand, the second part of that connected strategy is what we call a connected delivery model. Right now, I have to create this great customer experience with high efficiency. Here, there are sometimes very interesting innovations around companies being able to connect previously unconnected parties.

If we think about Airbnb, Uber, or Lyft right here, to us, the key innovation was connecting existing parties that piece of unconnected. We always have people who had a room open for rent, and we had people who needed to stay, but they were never really connected. By creating those connections, firms were able to create, again, great customer experiences at relatively low efficiency.

Those are kind of the two key elements for us that make up a connected strategy. Digital transformation, let's put it this way. Technology quite often allows these connected strategies to come about. In part, the question is, why now? Why haven't we seen those 20 years ago? It is. Again, we can talk about various facets of technology that make connected strategy now possible.

What we're really emphasizing in the book is that quite often these connected strategies are not technology innovations. They're technology‑enabled, but the innovation is at the level of the business model.

Coming back again to the Uber example or the Lyft example it's not that Uber developed cell phones, GPS, or Google Maps, but they used those elements, found a pain point, and created a new business model around that.

That, to us, is in part the exciting thing being business school professors and not engineering professors [laughs] that I think a lot of the value comes from connecting almost existing technologies that are now existing. They hadn't existed 20 years ago, but they're now existing, and they're becoming even better.

That coming to your question of, "Who's doing it well?" I think as technology is also evolving the space of connected strategies will open up quite a bit and allow new business models to come about.

Dan: [10:31] Obviously, Fortune 500s are incumbents in where they work. They have scale. They have revenue, but you see upstarts. The examples you gave with Uber, Airbnb, you see them, create more market value than the traditional incumbents sometimes?

Nicolaj: [10:44] Yeah.

Dan: [10:44] What is driving that? Do you think that there's an advantage to an upstart having a connected strategy from day one versus a Fortune 500 trying to adopt one while they're already mature?

Nicolaj: [10:57] I think it's yes and no. I completely agree with your statement that yes, starting out as a company that thinks about connected strategy from the beginning and creates a whole organizational structure, a business model mindset around that.

That clearly isn't advantage over an incumbent that has to rethink of, "How do we restructure our organization? How do we share information across silos that have never talked to each other in order to create, for instance, that seamless customer experience?"

That is indeed difficult for incumbent firms. At the same time, incumbents have tremendous advantages. They have already customer relationships. They might have a trusted relationship with customers.

If you're thinking about ‑ two settings that come to my mind are ‑‑ health and finance, tremendous opportunities await for connected strategies, but there's huge trust issue between customers and companies. It's one thing if I order a book on Amazon, I need a certain amount of trust that this will happen. There's something else about sharing my personal health data or my financial data.

I think it's not impossible, obviously, for new firms to come into these spaces and create an alternative model. But to build up that trust with customers, that will take probably quite a long time. In those instances, incumbents have a tremendous advantage.

Now, they still have these huge challenges that we just talked about. It's a little bit of a trade‑off. This is why I wouldn't count out our big incumbent firms and say, "OK, in 20 years, it'll be only just in startups." It'll be probably a mix.

We'll have some startups that have evolved, larger firms that have been able to create these class relationships with customers, and some of the larger firms that have been able to make the transformation.

Dan: [12:58] Let's say I'm an innovator and an incumbent and essentially want to drive transformational change in my organization through connected strategy. I'm focusing on this first point that you mentioned around the customer experience and improving the customer relationship. How do I start?

Nicolaj: [13:16] The most important starting point is understanding the customer journey. How is the customer going through an interaction with you? When we talk to managers and ask them, "What are value drivers for your customers?" quite often, managers will focus right away on tangible and intangible aspects of their product.

"My product has these kinds of features. My product is fast, has these bells and whistles." Obviously, these things are very important. But quite often, the interaction that a customer has is basically solving a problem in their lives. That problem starts way earlier than me getting the product that you're offering me.

That journey starts with me being even aware that I have a need for this particular product or service, but then I need to understand what are the range of options out there that could solve that problem. How do I decide what's the best problem?

Then, I have to order it. I have to receive it. I have to pay for it, and then only do I get that product. Of course, once I have that product or service, probably my situation might change. There's some after‑sale service elements to it.

There's this long customer journey. I think there are lots of opportunities to help customers in this journey. Now, that also opens up abilities for firms to differentiate themselves beyond the product and service that they sell. Often, when we talk to companies, to managers, they said, "Well, sorry, Nikolai, but I'm in a commodity product."

How do I differentiate? Maybe, a prime example would be if you're selling an index fund. I'm selling you an Index S&P 500 fund. I grant you. This is really hard to differentiate [laughs] because you're selling exactly the same basket of stocks.

Clearly, if I'm in that world, I cannot differentiate on the product. What do I have to do? I have to go back in the in the customer journey and say, "OK, what's the need? What's the fundamental need my customer's trying to fulfill?" In this case, maybe I need to do some saving for retirement.

Already, there's the first pain point that very often people are becoming aware of their needs, not at optimal times. When I turn 60, it's probably not the best time for me to become...I need to save for retirement. When I'm lying on the floor, and my heart is kind of jumping around with a heart attack, it's probably not the best time to become aware of my healthcare needs.

Again, quite often, that's how we work. We wait for the customer to become aware of their needs before anything happens. Customers are not aware of the needs at optimal time. If we can even help customers in that early stage of the value chain, we can already start building a relationship with that customer.

I'm aware. I need to save for retirement. Gosh, there's so gazillion of options out there. I probably don't know all of them. If you can help me understand what are the options out there? What's the best option for me? Now, I know I need some kind of diversified portfolio of bonds and stock funds. How do I buy them? Do I need a broker? Can I do it myself? Can someone else do it?

By the time I'm saying, "OK, I want to buy that S&P 500 Index fund from you. I've already solved so many other problems. My decision is not, now who has the better S&P 500 Index fund? When you ask, "What's that first step that we would ask companies to do?" it is to think it through. What is this customer journey?

Again, there are maybe multiple customer journeys for different customers, etc. Identify pain points along that customer journey.

You ask yourself, "OK, what kind of information would I need for me to be able to eliminate that particular pain point? What kind of connection/information flow would I have to create from the customer to me? Is it something that the customer can send to me, or can I automatically hover above that customer and extract that data? What kind of information do I need?"

This gets to this whole point of where do you start with this whole process [laughs] of creating a connected strategy. I think one of the key problems that companies are facing is that they have lots of data, but they don't know what to do with it. If you have identified a particular pain point, then you identify the data. Then you can think about, how do I get that data?

All of the sudden, you have also a very different conversation with your customer, your client, or your patient, whoever it is, of why you want this piece of information. You can show the customer a clear value proposition.

You're saying, "OK, you give me this piece of information, and in return, I make your life better. I can remove this pain point." You prove that your customer. Then that customer says, "Wow, that really worked. OK, what other pain point can you help me with? What other information can I send you?"

Rather than companies going to customers and saying, "Well, give me all the data that you have, and then we'll do something with it." It becomes completely opaque to the customers what actually happens to my data. How have you actually helped me and my life? I'm not seeing this at all. Are you just monetizing my data in some other way?

That's why I think this deep understanding of customers is so important. That, as a matter of fact, again now is completely un‑technological. [laughs] This is almost anthropological. This is live with your customer. Deeply understand your customer. Try to understand in that daily life of that customer. That may be a B2B customer.

We don't necessarily have to talk about individuals. This may be a purchasing manager in a factory, in a refinery, or in a drilling operation that needs to think about when do I have to replace my drills and what have you.

What are their pain points? What's the information flow? Then we can think about the digital aspect, the technological aspect about it, of how do we now create these information flows in a very efficient way that's easy for them and easy for us to respond to.

Dan: [19:58] How do we measure that? Is there an equation or a quantitative element?

Nicolaj: [20:02] I think at the end of the day, the measurement is some kind of customer satisfaction and your profits. [laughs] That's the eventual goal. Now, understanding the pain points... Christian sometimes talks about this about being small data. This is not big data. That is small data of really embedding yourself with customers, trying to understand their pain points.

At some level, it sounds so obvious. I'm just again still struck at how many times when we talk to companies and managers about this. They have an easy time thinking about their pain points with their customers. [laughs] That customer is a problem that we have.

Putting yourselves into the shoes of a customer is exactly not an easy exercise, but I think it is so essential for us to really create some value, both for the customer and then hopefully for us as well because sometimes knowing needs of the customers earlier really helps you in efficiency. You can load balance your factory.

So often, what we see in B2B context is customer, in some sense, wait too long. All of the sudden everyone rushes in, and then you don't have the capacity to be able to respond in time. It gets all out of whack. You can drive your own efficiency by understanding the needs of the customers better. It's not just making the customer happier, but it's also increasing your own operational efficiency.

Dan: [21:48] What three tips would you have an individual to put themselves in the mind of a customer?

Nicolaj: [21:56] Obviously, it depends a bit on what industry we were in. In consumer‑facing industries, quite often, you are also a customer. It shouldn't be that difficult, but still, it sometimes is.

I think this is where a tight relationship of technology or R&D and sales is important, because quite often, the sales people are the people who are closest to the customers and understand probably the customers best.

They are the closest people who have been living with customers. It depends a bit on your sales force and what their attitude is about how to treat customers. Quite often, that is the level. It is basically try to sync the information from your customer‑facing elements of your organization. That sometimes means reaching down pretty low in your organization.

When I'm at Disney, I want to talk to some people who work in the lines at Disney World because they are the ones who really have the interaction with the customer. They see the customer. They see this customer suffering or see the pain points. [laughs] It's the people manning the counters or at the hotel reception desk or whatever. Those are the ones who are really customer facing.

I think that's quite often where some very important information lies that generally has a hard time traveling upstream in the organization.

Dan: [23:28] How do those people get heard? Let's say I'm the example as someone at the front of the line at Disney or at a front desk at a hotel. I feel like my management isn't hearing my voice, but I have some very tangible ideas. How do I drive meaningful change?

Nicolaj: [23:43] It's tough. It's very tough to drive. If you are that level, that's very tough. You don't have much leverage. I think we can drive, for instance, some improvement at the level of the hotel. Can we do it at the level of the hotel chain? There's different levels at which you can do this.

Now, in part, what makes connected strategies difficult is it indeed requires quite often information to flow across silos in an organization that exists. It does require some big buy in from someone relatively senior to break some of those silos.

One example we talk a lot about in our book is the magic band for Disney. This little device that you get when you go to a theme park that both allows you as a customer to have better customer experience because you don't have to have a ticket anymore. It opens your hotel room. You don't need a credit card.

At the same time, it provides Disney some information of where people are so they can help you find a good itinerary during the day. It allows them to create some interesting customer experiences.

When we talk to the Disney team about ‑‑ what was so difficult in implementing this technology? ‑‑ on one hand, there was a big price tag because a lot of technology had to be deployed. They said the biggest problem was organization. I think it's a common experience at many organizations that we treat our customers as five different people in five different databases. [laughs]

In Disney, it would be, "OK, you are in our database for online purchasing, and then you are in our database because that's where you booked your trip. You are in our other database in our hotel organization. Maybe, you are part of the information for the theme park. Maybe, within the theme park, there's a restaurant that we probably never gather any information from you there."

We treat you basically as five different people. If you wanted to create a consistent experience, you as a customer, you as the visitor would have to stitch this together. The phrase they use which I thought was quite evocative was, "We basically forced our customer to never get our own organization structure."

For them the big challenge was, how do we break down these organizational silos so we can share information across all of these databases?

Treat the same person as the same person and start to accumulate our learning about this person across these various instances in which we have touch points with that customer, even though some of the touch points are online. Some of them are in the hotel. We need to aggregate all of that together to really have a truly connected strategy.

That's hard to do unless you have someone fairly senior up saying, "Folks, you need to get this done." There being some incentives that have to be realigned, what have you.

Dan: [27:04] Ultimately, do you expect that those organizations that have the senior leadership to encourage that will foster better cultures so the person at the front desk or the person at Walt Disney World will be an organization ultimately that is heard because that culture is superior? Is that a thesis?

Nicolaj: [27:19] I think that's right. I think there is somewhat of a cultural alliance. To me, it is really super‑charging these frontline employees and their ability to interact with customers in a meaningful way. We need to give them the ability.

That ability is both training, but it's also technology‑enabled. This is, I think, where the amazing potential of connected strategies lies. We don't have to always have super stars, but we can make them behave as if they are super stars because they are technologically enabled, and they know everything about you.

All of the sudden, it's easy for me to customize your experience because I have all of that knowledge. I don't have to intuit this. I don't have to read between the [indecipherable] very quickly and see you are this kind of person who likes this. Let me quickly react to this. No, I have all of that information. Even a nominally skilled person can create an amazing experience.

Dan: [28:21] Process and product can really help a person execute at a level that wouldn't be possible otherwise?

Nicolaj: [28:28] Exactly. Think again about checking into a hotel. There's maybe the great person who has been there for the last 10 years, working there and still remembers you from every time you're coming through. That's an amazing person and highly skilled.

Now, here is the newbie. If the newbie gets exactly the same information very quickly, "Oh, it's Nicolaj coming in. Yes, he's been coming to this hotel for the last 10 years, and these are his preferences," all the sudden, that person can create a very similar experience without having had all of that knowledge or skill set before.

Dan: [29:01] If customer relationships are really key and then redefining your customer journey is going to set a path for you to grow, what do you think happens 10 years out on a company's delivery model?

Nicolaj: [29:13] Well, I think in many instances both will probably go hand in hand. Not always. We talk about five different ‑‑ I call them ‑ platforms, so five different connection architectures in the book of how firms really shape the connections among the various players in their ecosystem.

Dan: [29:39] Can you share some of those with us?

Nicolaj: [29:41] Sure. You have what we call a connected producer, which is let's say the Disney or the healthcare system where the key relationship is between the customer and the firm that provides and creates the products and services.

You have connected retailers, like an Amazon, that's not producing everything that they're selling to you. Now, of course, they are starting to do that. [laughs] There's now partly a connected producer. Still, a lot of the stuff they're just getting from other supplier, but they're actively involved in getting the stuff to you.

Then we have connected market makers that basically create just the marketplace, but they're not involved in moving products around. Expedia is not holding inventory of airline seats or hotel rooms. They're just connecting you directly to a supplier, and they get some commission from that.

Then we have crowd orchestrators. That would be like an Uber and Airbnb that basically just connect you to a certain extent, create this connection between a supplier and a customer, but now the suppliers are individuals.

In Expedia's case, it's existing companies, hotels, airlines, whereas now, it's like individuals who are not part as a matter of fact of the supply before. They're really creating entirely new market.

Lastly, we have peer‑to‑peer‑network creators [indecipherable] linked in the Tripadvisor or what have you, where you have these peer‑to‑peer connections.

Those are five different models of how you think about, how do we connect to the different players? The interesting thing to us is that most companies right now have one of these five models.

Amazon is a bit of an exception because Amazon is starting to play in multiple of these columns. They started out being a connected retailer. They became to a certain extent through Amazon Marketplace. Now, they're also of course a connected market maker where they're just saying, "OK, I'm just connect you to some supplier, but the supplier's shipping that directly to you."

They said, "Why don't we produce some of the stuff that we sell." Right now, they're connected producer. With their peer ratings of products online, they're starting a bit of a peer‑to‑peer network.

My main point here is if most firms currently are working in one model but as we're learning more and more about a particular customer, I might understand certain needs of that customer.

Your trusted provider, let's say in healthcare, I would like to help you also with your problem of getting to the doctor, which is actually quite sometimes a problem for people. How do I get from my home to the doctor? Now, I know this is a pain point in your life. If I'm really your trusted partner in helping you achieve good health, then I should be able to help you with that pain point as well.

Currently, I'm in a healthcare system, and I'm connected producer. If I just think about living in that ‑‑ for me, it's a column because that's how our framework works ‑‑ if I'm just in that particular connection architecture, that would imply now I have to integrate into transportation services. Of course, you don't have to.

You could now maybe become a connected retailer that says, "OK, if you also need a ride, just click here when you make your appointment, and we'll send a car to you. It's not our car. It's someone else's car, or we have a little marketplace."

The interesting thing is that as you are becoming more and more deeply embedded with your customer and understand this customer relationship better, that may require you also to add different connection architectures to fulfill also those needs. That's where these things go hand in hand.

To a certain extent, again, coming back to your question, what would I expect? I would probably expect that at least some firms who get really deeply involved with their customers may have a multiplicity of these connection architectures depending on what part of the customer journey we're trying to address.

Dan: [34:18] Got it. What advice would you give to someone trying to deploy a connected strategy?

Nicolaj: [34:25] I probably would say, start small in the sense of coming back to this point. Try to first understand one particular pain point that you think, "Wow. That could really add a lot of value to my customer,' and if you could remove that could also create quite some deficiencies for us." Try to find that.

Then try to understand, why can't we remove that pain point? Usually, it's an informational problem that I don't have that right information at the right time. Think about, how can we create that information flow? Start with that. Start with a problem that you want to solve.

I think many companies start on the other side and say, "Oh, gosh, we have all this data. What can we do with it?" That's quite often hard because I know certain things that I can do with the data, but I'm actually don't know whether that's solving a problem [laughs] and whether that eventually is creating some value in the eye of the customer.

Again, coming back to this word that I've used a number of times, fundamentally connected strategies are about developing a trust relationship with your customer. Yes, in the short run, we can screw people. But in the long run that's not a viable business model. To have a viable business model, we need to create that trust relationship.

I think the only way you create a trust relationship is by having a very clear quid pro quo. You are giving me this data, and I make your life better. You're very transparent about how you use the data, and you make it very clear to the customer of how that customer's life has improved.

Then a customer can decide of yes was that a fair trade or not. If it was a fair trade, then I'm probably willing to trade more of my information. That is a slow cycle that you will have to engage in with your customer, particularly if you're in the B2B world.

Coming back again, the B2B world, obviously, there are quite often companies that are very hesitant of sharing data with their suppliers or with their customers because think, "Gosh, I'm just laying my cards on the table. I'm now opening myself up for getting expropriated." For good reasons, companies are quite often very hesitant of sharing the data.

That's why it is so important to have that very clear transparent value proposition of saying, "If you could give me this data, I can do the following for you. Let's try it out and see whether both of us find this is a good transaction."

Dan: [36:58] Great. Nicolaj, thank you so much for joining us.

Nicolaj: [37:00] Thank you so much for having me, Dan. It was fun.

Dan: [37:02] Excellent. Take care.

Nicolaj: [37:04] Thank you. Bye.

Dan: [37:10] On the next episode of Decoding Digital.

Amit Bendov: [37:13] I think it's an addiction like I'll continue to work from my grave probably. I like to create stuff. That's what I am. I'm a creator by nature. Building a company is a great experience, especially when it's super successful.

Dan: [37:28] Co‑founder and CEO of Gong.io, Amit Bendov. Listen on Apple Podcast, Spotify, or your podcast player of choice. To learn more, visit decodingdigital.com. Until next time.