Spotlight Series: Exploring Connected Strategy
The Momenta Team
This series highlights the key insights and lessons from our Digital Leadership series of podcasts. We spotlight the important takeaways from our interviews in an accessible format. The following insights come from Nicolaj Siggelkow, Author, David M. Knott Professor of Management at the Wharton School at the University of Pennsylvania and Co-Director of the Mack Institute for Innovation Management. Stay tuned for the full podcast interview with Nicolaj, in the meantime, take a look at our full library of podcasts.
Could you share a bit of context of your personal history, and what has brought you to where you are today?
I originally am from Germany, was an undergrad at Stanford, did my Economics degree there, got my PhD at Harvard in Business Economics, and have been at Wharton School in faculty for the last 21 years teaching strategy. Another role that I’m playing here at Wharton is I’m also Co-Director of the Mack Institute for Innovation Management, where this topic of connected strategy came up that I’ve been pursuing with my colleague and good friend Christian Terwiesch.
Could you share a little bit about the thesis of the book, Connected Strategy, and the key drivers behind the work?
The overarching idea is that what we see right now across a whole set of industries, is that firms are fundamentally reshaping the way they interact with their customers. So, rather than sitting there waiting for a customer to come to us, firms are now trying to create much more continuous relationships with their customers. Maybe one example that was also one of our initial examples which really motivated us is healthcare. Usually the way I interacted with the healthcare system is, I wait for something really bad to happen, then I go to see my doctor, I go into the hospital. Once I’m in the hospital I have complete attention on me 24/7 by doctors, by nurses, and then at some point I get kicked out and I get completely disconnected from everything, and everyone now is basically just waiting for something catastrophic to happen again, so I get readmitted.
I think the moment you put it that way you can start to see, wow, that doesn’t sound very efficient, either for me as a patient, or from the system as a whole in terms of how much cost we have. So, that I think was one of the things that really got us fascinated about these connected strategies was that quite often firms were able to create a better custom experience, or patient experience, whilst at the same time reducing cost. If you can do both things at the same time, create a better product or service, or a better customer experience, whilst at the same time reducing cost, then you might have some disruption at your hands. That’s what we’re seeing in a number of industries, companies coming in and really disrupting those industries, because they’re able to do both of these things at the same time.
What has changed that has enabled this ability to have both the technological transformation, but also this enhanced customer experience that couldn’t be done before?
What has really changed is technology. We sometimes think of four different types of technologies, there’s technology that allows us to sense problems, and that is the cost of sensors has come down, the cost of extracting information has come down. Then there is the cost of transmitting that information, and there’s the cost of analyzing that information, and the cost of reacting to it. All of these things have come down dramatically, and this is what starts to allow us to have these new connected strategies. But what’s really important to note is that firms who are creating connected strategies quite often are not the firms who are developing these technologies, so a connected strategy is technology-enabled, but you don’t have to be a technology innovator to have a connected strategy. So, if you think about Uber, Uber did not develop cellphones, GPS, and Google Maps, but they said, ‘Well, if you put these technologies together, we can create a new business model that can be quite disruptive’. Fundamentally what connected strategies are about are really business model innovations, rather than technological innovations.
The adoption of advanced analytics, and of course machine learning and AI have been very top of mind in terms of the role that they play in refactoring a lot of tasks of course. I’d love to get your thoughts on how some of the successful digital companies and connected strategy companies, are employing machine learning/AI technologies to really enhance the efficacy of their products and solutions.
I think there are certainly very powerful tools, but I think where quite a number of companies are stuck at is, they don’t know what problems these tools are supposed to solve! So, there’s a little bit of disbelief, ‘Well, we’ll just have big data and we’ll run our algorithm, and it will tell us something interesting’. I’m somewhat skeptical, both Chris and I are somewhat skeptical about that approach, so I think because a lot of companies currently are stuck at this phase of, ‘Well, we’ve collected all this data now because it has been very cheap, but we have no clue what to do with it’, ‘Well, let’s get an AI guy in there’, ‘Well, I’m not quite sure that’s actually the solution’.
What we would advocate is you first really understand in quite some depth the entire journey that the customer has with you, and what we mean by this is that the journey of a customer usually starts with some awareness of a need; I sort of know that I should be saving for retirement, let’s say. Okay, so now I’m aware of that need, now I need to think about what are all the options out there for me? So, there’s a gazillion options from life insurance, to mutual funds, to ETF, and I have no idea what all these options are. So, ‘Can you help me understand what these options are?’ then, ‘Can you help me understand what the best options are for me?’ Now I know this but, ‘Now, how do I order this, how do I buy this? Do I need a broker, can I do it myself? Right then, I need to do…’ and at some point, I enjoy the product or the service.
So, understanding that entire journey, now understanding what other pain points that the customer has along that journey, and then asking the question, ok, so what kind of information would I need from that customer, in order to be able to remove a particular pain point? And now, that matching yes AI might become really helpful, and I get more information about that particular customer, for instance understand what the best portfolio for that customer might be, or, to do some predictive analytics of trying to understand why that customer needs change over time, so I can anticipate those needs. So, clearly there’s some big technology that can help us, but before we understand what problem we’re trying to solve, the technology by itself will not do the job for us.
I’d like to look forward a bit and get a sense of some of the areas and some of the changes that you’re most optimistic about, given all the work that you’ve done in putting together these useful frameworks in your book, and also some concerns or potential risk that are out there that keep you up at night.
Again, I think the overarching hope that we have through these connected strategies, and the potential of these connected strategies that we’ve seen, is really that it will drive a tremendous amount of value creation, that we're really creating better experiences for customers, better experiences let’s say for patients, while at the same time reducing cost. So, that’s I think is the great promise of these connected strategies, and that’s what really made us excited about them in the first place.
The concerns are of course distributional, who gets this extra value? Sometimes the value gets created in an entire population, and then the question is who gets how much of the benefit. If you think about natural concerns that we might have of sharing too much information with our insurance company, I think overall, we can probably drive down costs quite a lot if we had deeper information exchange let’s say with insurance companies. But then the question is, who is going to benefit from it, is it just the insurance companies, is it just the really healthy people? And so now if I’m not healthy I’m really getting screwed, but isn’t that the kind of role of what insurance is, it’s somewhat of a risk pooling?
So that I think as well is where regulation will have to play an interesting role, of making sure how are we creating a system where the gains that we’re producing get somewhat spread around, in a way that everyone wants to participate in that particular system. Those are sometimes I think always the concerns that go along with the data privacy/data security, obviously any data that we have can be used in ways that also don’t just create value, but potentially shift value, kind of, ‘I know now something about you, and I can exploit you. I know you’re away from home, so let me send the burglar round to your house’. Obviously, there are those concerns, they’re not around connected strategies per se, they are about that much more richer information flow that we’re going to have.
Looking forward I think part of this process are somewhat inexorable, because I think everyone’s expectations are slowly rising, that when I interact with an organization, when I interact with a company that I get much more personalized attention, a much more individualized treatment. It’s not just I come to you and you just treat me as if you’ve never seen me before. I go to Amazon and Amazon knows stuff about me, and they can start to interact with me in much more personalized ways than if I go to a Walmart store. So now Walmart has to ask itself, ‘Okay, how can I create those kinds of recommendations that I can do online, how can I do it in offline ways so as not to fall behind?’ because the expectation of customers, of patients, of students are rising, that you are providing more customized experiences.
Again, this is just a slower process, but I think it is a process that will continue as generations grow-up with more customized things; ‘What do you mean I have to listen to everything on the radio? Just send me the stuff that I like’, and again we can think about how good this is, and how bad this is, and echo-chambers etc., but that is I think a general direction in which things are moving, which are probably hard to roll back.
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