Our experience economy demands customer relationships based on the right business models and processes. Two Wharton School professors share their research on developing and keeping strong customer relationships. This topic goes beyond marketing alone into the core of management, customer service, and even branding.

Nicolaj Siggelkow is the David M. Knott Professor at the Wharton School, University of Pennsylvania. He is a Co-Director of the Mack Institute for Innovation Management at Wharton. He studied Economics at Stanford University and earned an M.A. in Economics from Harvard University. He received a Ph.D. in Business Economics from Harvard University and the Harvard Business School. Professor Siggelkow has been the recipient of multiple MBA and Undergraduate Excellence in Teaching Awards, including the Class of 1984 Award presented to the faculty member with the highest teaching rating in the MBA classroom, the Helen Kardon Moss Anvil Teaching Award, the Wharton Award, and the Wharton Graduate Association Student Choice Award. His research has been published in the leading management journals, including Academy of Management Journal, Administrative Science Quarterly, Journal of Industrial Economics, Management Science, Organization Science, and Strategic Organization. In 2008, he received the Administrative Science Quarterly Scholarly Contribution Award for the most significant paper published in ASQ five years earlier. Nicolaj is a member of the Editorial Review Boards of Administrative Science Quarterly, Organization Science, Strategic Management Journal, Strategic Organization, and Academy of Management Perspectives.

Christian Terwiesch is the Andrew M. Heller Professor at the Wharton School of the University of Pennsylvania. He is a Professor in Wharton’s Operations, Information and Decisions department, co-director of Penn’s Mack Institute for Innovation Management, and also holds a faculty appointment In Penn’s Perelman School of Medicine. His research on Operations Management and on Innovation Management appears in many of the leading academic journals ranging from Management Science to The New England Journal of Medicine. He is an award winning teacher with extensive experience in MBA teaching and executive education.

Professor Terwiesch is the co-author of Matching Supply with Demand, a widely used text-book in Operations Management that is now in its third edition. Based on this book, Professor Terwiesch has launched the first Massive Open Online Course (MOOC) in business on Coursera. By now, well over 250,000 students enrolled in the course.

Transcript

Michael Krigsman: What's next for customer experience? That's our topic today. We are speaking with two professors from Wharton, Nicolaj Siggelkow and Christian Terwiesch, authors of the book Connected Strategy. Gentlemen, welcome to CXOTalk. I'm so thrilled for you to be here.

Nicolaj Siggelkow: Thank you for having us.

Christian Terwiesch: It's great to be on your show, Michael.

Michael Krigsman: As a way to start, I'll just ask each of you to briefly introduce yourselves.

Nicolaj Siggelkow: Let me start. My name is Nicolaj Siggelkow. I'm a professor of strategy here at the Wharton School. Actually, both Christian and I joined at the same time about 21 years ago. As you will probably tell from our accents, we are both originally from Germany as well, but we've been in this country for a long time and have been here at Wharton and are really enjoying our time here.

Christian Terwiesch: My name is Christian Terwiesch. I'm going to be the other actor here in this German comedy. I've been with Wharton, with Nicolaj, for 21 years. I also have a secondary appointment at the School of Medicine and so, when we talk about customer experience, for me that oftentimes also means patient experience.

What is Customer Experience?

Michael Krigsman: As we have this conversation, we should definitely drill down into patient experience. I think it's a great example. Nicolaj, let me begin with you and ask, when we talk about customer experience, it's such a vague term. What actually does it mean and why does it matter?

Nicolaj Siggelkow: I think the interesting thing is when you ask managers to think about the customer experience or what other value drivers that customers have for their firm's product or service, they immediately go to tangible or intangible aspects about their product: the quality of the product, the speed, the size, maybe the brand. What is really important to understand about a customer experience is that there is a whole customer journey a customer has with you.

It starts from the moment a customer becomes even aware of a need to understanding what are the options out there to ordering, to paying, to receiving. Then, actually, only I'm experiencing the product and then also some after sales service support. It's a whole customer journey and what we are talking about in this book are the various ways of how really to think about customer experiences in a much broader sense than just about the product that you are getting.

Christian Terwiesch: Yeah, to put this in a medical context, it's really not what just happens between you and the doctor or while you, as the patient, are in the hospital. It happens in the time that precedes you coming to the hospital. That's where you are hopefully kept healthy and it continues when you're being discharged. I think the idea of being connected is a very powerful concept that you're not just doing a good job in the moment of the experience of the service or product but really think about this whole customer journey.

Michael Krigsman: The notion of customer journey, can you say that that is the fundamental building block of customer experience? Would that be an accurate way to put it?

Christian Terwiesch: From a customer experience perspective, yes. We think about the customer journey starting with the revelation of the need, the customer, the patient becoming aware of the need him or herself, going through that process, the cognitive process of what you're going to do about the fulfillment, leading ultimately towards a very specific request to a company, do something for me, and the response from that company saying, "Here is how I can help you." In the spirit of what we call a Connected Strategy, there is this customer-centric piece, but then there is also a whole fulfillment piece and how you connect with your value chain of making the connected customer experience happen.

Michael Krigsman: It's the product. It's the journey. But then when you talk about the connected customer strategy, maybe elaborate on what you mean by that network.

Nicolaj Siggelkow: There are connections on two different sides, right? There is the one fundamental way of what connected strategies do is to really reshape the way you're interacting with your customer or your patient. Rather than having these few episodic interactions, to have a much deeper relationship that potentially, for instance, allows you to anticipate needs.

Let's keep going with a medical example. Quite often, when a patient is aware of a need, it's already too late or really inefficient. I'm already lying on the ground having a heart attack. That is probably not the most efficient time to become aware of the need and for the whole system to solve that problem. By having a much deeper connection, I might be able to anticipate the need.

Now, even if the customer knows I have a need, the customer may not really know what is actually the best option of how to fulfill that need. Now, again, I can help that customer. If I know a lot about that customer by having, for instance, a good data stream from the customer to me, I might really be helpful in helping that customer understanding what are all the options out there. For instance, you have some heart palpitations. What should you be doing and what might be the best solution for you?

The connectivity part on the customer side is really eventually making that customer journey really, really smooth and frictionless and making it way more efficient for us to provide and for the customer to value more. That's one part of connectivity or parted of connected strategy.

The other part of the connected strategy is, how do we actually create these connected customer relationships in an efficient way? Again, using healthcare, it's very easy how you can increase the value for a customer. You just put a nurse and a doctor next to the person 24/7, right? [Laughter] Then the customer would be rather happy, or that patient would be rather happy, but it's really, really inefficient to do so.

The second part of our book and of the framework is really thinking about these different connected delivery models. That may require us to connect various players in our ecosystem that previously have not been connected. We have connectivity on both, the side of the customer and on the side of the delivery model.

Michael Krigsman: This notion, again, of customer experience, what would be even the right term? I was going to say a good, authentic, positive customer experience, a deep customer experience. I'll let you guys tell me the right term. But it then requires tendrils, so to speak, reaching out that relate to the customers' environment, to the customers' psychology.

Christian Terwiesch: I think, Michael, you're asking a deep question there. I think it's helpful to backpedal a little bit and just realize that customers neither want products or services the customers don't need, whether it's the healthcare space, if you go a little bit maybe into the active lifestyle, into sports. You might say customers have a need for a running shoe. That's one way of framing the problem.

Really, what they want to do is run. Many of them want to run because they want to stay healthy. You can think about deeper and deeper needs.

When you think about the company who is kind of sitting on the other side who is trying to help them fulfill their needs, if you are just in the running shoe business, you're competing on a very transactional basis with a customer and the customer is only entrusting you at a very transactional, superficial level. If you become their partner for life that keeps me healthy, that keeps me active in life, you have a much better competitive position. You're adding much bigger value to the customer in many more ways than just selling a great shoe.

Customer Experience and Internal Employees

Michael Krigsman: We have a question from Twitter. Arsalan Khan is asking about the mix between external customers and internal customers, namely employees. When I have spoken with a number of CEOs on this show of large organizations, oftentimes they raise the fact that good customer experience has to begin with internal employees. Do you have any thoughts on that?

Nicolaj Siggelkow: Okay. Actually, I thought the question was going a slightly different direction because the intriguing thing is, we can think about a connected strategy, not necessarily just between a firm and their customers, and we can sometimes also think about internal connected strategies within an organization. If I'm the legal department in an organization, though I have few episodic interactions, do I just basically wait for someone to come with a problem to me and then I help them or am I actually internally connected so I can anticipate the needs of my clients within my own organization? We are actually seeing some very interesting ways of how firms are thinking about connected strategies inside their organizations. That's one piece.

Now, the other piece that maybe that question is really getting at is another really important point that connected strategies, of course, use technologies. Quite often, new technologies is what enables connected strategies to be implemented, but technologies are usually, actually, available to everyone. That's quite often not the source of difficulty of implementing connected strategies. The real difficulty, quite often, is indeed organizational, and be that at the level of the employee and the level of information exchange within the organizations.

Coming just a little bit back to the question you asked earlier about how to think about experiences and then what's this other term, and so we could call this other term actually a relationship. That's actually why we are thinking about it as connected customers' relationships.

There are a series of experiences that you have. Again, each experience we want to make as smooth and as easy as possible with you as a customer. But to really, eventually, get to this relationship piece, we have to learn whenever we interact with you and become sort of better and better at understanding your needs and fulfilling them. We need to move slowly through experiences to really then being able to address these more fundamental needs that Christian was talking about in having a trusted relationship with our customer.

Trusted Relationships and Customer Experience

Michael Krigsman: Christian, trusted relationship, is that the fundamental building block, can we say, that we're going for?

Christian Terwiesch: It's a fundamental building block. In our framework, there's a little journey from the customer experience side. It starts with recognizing the need, so recognize I need something or the firm recognizes I need something. At some point, that recognize is codified in some form of a request. I want a new toothbrush. I might have the healthcare system intervene and send me an ambulance. Recognize requests, and that is the response.

The firm sits on the other side. They get this data and send the response to my need. But the value and the relationship that Nicolaj really emphasizes is recognize, request, respond, repeat. You start over again, and that builds two things. That builds the trust that, Michael, in your question you were after, but it also really builds a form of efficiency that allows us to break this tradeoff between the willingness to pay, the customer delight, the customer happiness on the one side and the fulfillment costs on the other side.

By repeatedly doing that loop, I can customize. I get to know you better, Michael, and I can customize the products and services to you and your specific need. Even better, what I can do is I can learn. We call this meta-level data and meta-learning. I can learn about the population in your market segment. People like you, Michael. That allows us to provide new products or services, change our assortments, and that makes everybody better off. Absolutely, this repeat, I mention, is critical.

Customer Experience in Healthcare (Patient Experience)

Michael Krigsman: We have a really interesting question from Twitter. I think this probably is for Christian because of the healthcare angle. Sal Rasa says, "How do current HIPAA and other government regulations inhibit the flow of critical patient information and does this inhibit then customer experience? How can communication make that customer or patient experience better?"

Christian Terwiesch: Clearly, in the healthcare world, a lot of the connectivity examples that we've seen in other industries, if you think about Disney with their MagicBand, if you think about the relationship that we have with Amazon, those companies are five, ten years ahead of the healthcare space because the healthcare space is heavily regulated. That regulation, we can always kind of point fingers at legislative forces and complain about them. By and large, these regulations are, I would argue, a good thing. You see, increasingly, healthcare systems doing the type of things that we're talking about.

Nicolaj and I are working for the University of Pennsylvania. That is where the Wharton School is hosted. We had a very big healthcare system called Penn Medicine. Increasingly, you see the big systems, the big infrastructure providers, like an Epic or so, basically building the building blocks that allow for a secure exchange of this type of HIPAA information, of the electronic health record for the patient where everything is becoming digital. The infrastructure is there, and I don't think I have to be a prophet to predict that, I the next five years, we'll see a massive explosion of these types of connected services in healthcare.

Michael Krigsman: You were talking earlier about this notion of efficiency and customers' willingness to pay and then the cost of fulfillment. Would you elaborate on that? That seems like it's another really crucial point.

Nicolaj Siggelkow: I think about, how do we create value in the eyes of the customer? Different customers will have different value drivers. You can sort of summarize all of that in the concept we might call a willingness to pay or the perceived value that the customer has from getting a particular product and service. That, for instance, can be a function of the product attributes but, overall, again, thinking about willingness to pay drives along the entire kind of customer journey is really what opens up this thinking around more connectivity. That's the value that we are creating in the customer's eye.

Then there is, on the other hand, a cost that we have of creating that particular experience, and so there is a tradeoff. Again, as I said with the example of the doctor and the nurse who are standing right next to me, my willingness to pay for that service is relatively high or, let's put it this way, the value that I'm getting out of that particular service is really high. But also, the cost of providing that service is really high.

Conversely, I could have only telemedicine and I never see anyone. Whatever it is, I'll have to maybe inject myself. That's a really low-cost solution, but the quality of that is not very high because I might not actually hit my vein if I do this. There is usually a tradeoff, and so we're thinking about this as a frontier, a certain efficiency frontier and an industry that describes that tradeoff between the willingness to pay and the fulfillment cost.

What has been quite interesting is that evolutions and developments around connected strategies really have allowed firms to push out that frontier, to be able to actually create a service or product that customers like more than the existing solution, and the firm is actually able to create that superior experience at a lower cost. That, of course, is very disruptive because now the firm comes in that has a better product and they can probably offer it at a lower price because their cost is even lower.

A good example might be Uber or Lyft. All of a sudden, customers say, "Hey, that's actually better than a cab experience," and Uber and Lyft can create these rides at a lower unit cost than a cab company has. That's why there's disruption.

From the perspective of the existing firms in the industries, these new connected strategies look like, "Wow!" kind of blown out of all this tradeoff. Now, of course, that tradeoff still exists, but now it exists at a higher level, right? We have pushed out that frontier. That is kind of the underlying, we call, "magic" of the connected strategy that sometimes actually allows you to do both of these things and that creates disruption.

Christian Terwiesch: Yeah, let me add to that. When I started working in healthcare some 20 years ago, I was initially labeled an evil person, people said, the productivity of the doctor fulfillment because their perception was that, well, what would do as an operations professor, I make things cheaper. I would lower fulfillment costs. In the spirit of the tradeoff that Nicolaj was just talking to between the willingness to pay, the quality of care, and the efficiency and proof of efficiency, the default assumption was that, well, of course, quality has to come down.

The idea of operations management is, by being smart, I can improve by taking out cancellations and no-shows, by freeing up the provider of some unnecessary work. I can shift that frontier and make things better. Better quality at lower cost.

But in operations management, I've been frustrated with that over the years. You can only push the current system so hard. You can only take that much waste out of the system. What I'm excited about our work here on connected strategy is really these game-changers, these forces of disruption in not just shifting the frontier by a little bit, but just totally redefining the industry. I think that is the value proposition of our work.

Technology is Not Customer Experience 

Michael Krigsman: Would it be correct to say that the value proposition of the book is, how do we use technology or other means to push that efficiency frontier out so that we're delivering better experiences at a lower cost for customers to the point where it becomes, as you said, disruptive? Is that an accurate way of saying it?

Christian Terwiesch: I think so, but I want to go back to something that Nicolaj said. I think he was about to say that.

Nicolaj Siggelkow: [Laughter]

Christian Terwiesch: The same thing, right? We're alike a little when we hear, like, how to use technology. The bottleneck here is not technology. The technology it out there. We're living in the world of sensors, smartphones, connectivity. The technology is there. The limitation is our ability to imagine a new user experience partly because we never had so many degrees of freedoms as managers.

We can do now things that were never possible 20, 30, 40 years ago. We can do these things, so we're limited by our imagination. We're limited by our current way of doing things. We hold a certain set of assets, resources and, again, we don't see how we could reconnect them in new ways to create the fulfillment. I think about this more as a business model of innovation but, short of that, Michael, I thought your summary of the book was pretty good.

Michael Krigsman: That's really interesting. Okay. When you start pushing that efficiency curve and rebalancing the cost of fulfillment -- I was going to say the cost of delivery -- with the customer's willingness to pay, technology is not necessarily the driver, but it's rethinking the business model. That becomes the underlying driver of your ability to make this kind of change, disruptive change.

Nicolaj Siggelkow: Technology, of course, plays a role. Again, let's think about Lyft or Uber. Clearly, without cell phones, without GPS, without Google Maps, that would not work. It's very hard to coordinate, understand who are the customers out there, who are people who have a car. Without those technologies, that business model would not work.

At the same time, it was not Uber who developed all of these technologies. They didn't say, "Okay, in order for my business model to work, I now need to create a maps product. Now I need to create a way of connecting people via some gadget that connects somehow wirelessly."

No. Those technologies were out there, and so they said, "If we can put these technologies together, all of a sudden we can come up with a business model that can really create disruption. That's kind of the point. Certainly, technologies are important, but they're quite often out there, so it's the business model.

Now, the other part, and we started talking about this a little bit earlier, is really this notion of the organizational change that may have to happen. Fundamentally, again, what connected strategies are about is basically this notion of customer centricity. You really want to think about one particular customer. You want to make that customer really happy by understanding the various pain points this customer has along the customer journey or the particular willingness to pay drives for that customer, so we need to understand that customer really, really well. But, quite often, we are actually not organized that way.

When we talk to the folks at Disney who create the MagicBand, they said, "Of course we want to create the seamless customer experience from the moment you go online and you want to think about a vacation. You book your vacation. You get on the plane. You get out in Orlando. You somehow get to the hotel. You check into your hotel room. You get to the theme park. You get on some rides. You get some food. You go home."

All of that should be one consistent, seamless customer experience. From a certain aspect, it is because it is one person experiencing all of that. The problem is really that that person has to deal and navigate through the organizational structure of Disney. Once in a while, I have to interact with the online division. Then I have to interact with the hotel division. Then I have to interact with the restaurant division. It's basically left up to the customer to stitch together these things and somehow understand how Disney, the organization, is working.

They said, "That we have to change. We have to change the information flow within our organization so that we all understand and learn about that particular customer no matter what touchpoint we have for that customer, be it online, be it offline, be it in the theme park, in the restaurant. That's really tough. That's really difficult, but that's more of an organizational change than just a technology change.

Role of Data in Creating Connected Customer Experiences

Michael Krigsman: Organizational change is such an important one, but I'm also mindful of the time. You've described it very eloquently. Let me shift gears a little bit and ask you about the role of data in being able to create these kinds of connected customer experiences that you're describing.

Christian Terwiesch: Data is created as you go through this loop to recognize the need and form a request. Either the firm forms a request or the customer forms a request. The firm responds. Recognize the request, respond, repeat.

As we're going through that cycle, data is like an exhaust. It's like a byproduct. It's generated. What do you do with that data?

The first thing that you do is you learn about Nicolaj over time. You learn his preferences. You learn that he likes German comedies, if there is such a thing. You learn the food preference over time. You basically get better and better at serving Nicolaj.

But there is not just Nicolaj. There are many other people like him. Sorry, he is unique, of course, but there are many people in that market segment.

Nicolaj Siggelkow: [Laughter]

Christian Terwiesch: By having learned about all of those, you can start finding opportunities. You start creating new series, new jokes, new comedies. You start providing new meals at the restaurant. That allows you again to shift that frontier because that is data that allows you to take the most advantage of the expensive resources that you have and to gain insights that your competitors don't have.

Nicolaj Siggelkow: I would just add because I think one misconception I think we tried to remove so far was that connected strategies is all about technology. I think the second misconception is, connected strategies is all about data. Data by itself actually doesn't do anything. Lots of firms have lots of data. I know now every click that you've ever done on your webpage, and now I have gigabytes of data, but I have no idea what to do with it.

I think what we are really pushing here in the book is, quite often the way to think about it is coming back to this idea about the customer experience. Really ask what are the pain points, what are the value drivers, and then you can ask what kind of data would I need to relieve that pain point, to delight the customer even more.

Really, the fundamental thing is about learning. Of course, learning requires data. Data, of course, is important, but it is really that learning that is the important piece.

That actually, again, doesn't happen by itself. Just having lots of sensors out there and receiving gigabytes of data is not going to create a connected strategy. It's then asking, what do we need to do with this? That's really kind of that learning loop that Christian was talking about, both learning at the level of the individual and learning at the level of the population.

Michael Krigsman: But that implies then that you know going in what are the questions that you need to ask, "What do we need to learn?" which then requires a deeper kind of strategy.

Christian Terwiesch: Yeah, I like the way that you put it. I think there is big data and there is small data. I think any good strategy formation is not just done by an executive sitting in a corner office looking through big databases using Excel or Tableau or some kind of fancy algorithm. You only have to get a sense of what are the insights from talking to the customers. What are the user experiences that they want?

We find it helpful, in the spirit of customer experience, to distinguish situations where the customer just wants something. They know that they want it. They know what they want. They just want to press a button.

Really think Uber. I know I want to get home at 3:00 p.m. today. I know where I live. Just make it as simple as possible.

Then we have something that we call a curated offering. The pain points really have to do with the fact that I really don't quite know what I want. I know that I'm hungry, but I don't know where I want to eat and what I would enjoy. I know I want to watch a comedy tonight, but I don't know what the recent releases are. I know I want to get a pay raise, but I don't know what to study in accounting.

The next level up is, I know I want to stay healthy, but sometimes I'm a little reluctant. I'm a little lazy. I'm a little myopic. Then I'm looking for somebody who gives me a little kick in the rear to just make me go and encourages me.

Then, in the very extreme situation, I might really want to outsource, to delegate a problem that I have, like balancing my portfolio or tracking the safety of my house. I just want to say, "You, company, you deal with all of that."

Those are four very different user experiences that we described in the book. They require very different data and they do require very different strategies. It is your role as an executive to have the vision to ask yourself, "What does a particular customer really want along that spectrum?"

Use Data to Create Connected Strategies

Michael Krigsman: We have another question from Twitter, a really interesting question; actually, two from Gus Bekdash. The first question he asks is, "AI and digitalization have enabled enterprises to present new faces and collect new data. How does that data, that new type of data, affect customer relationships?" Then he goes on to ask about what do enterprises owe their customers regarding how they use that data.

What I'll ask you then is, how does data, this new type of data, affect the ability to have change evolve these customer relationships? Then, rather than talking about privacy so much, if you can then kind of shift into the notion of trust.

Nicolaj Siggelkow: That's a really important point, right? We talked a little bit earlier about how firms would like to transform experiences into relationships, kind of slowly move up that hierarchy of needs. I'm not just helping you deal with your cardiac problem right now. I try to keep you healthy.

That move towards becoming more a trusted advisor or having a trusted relationship is, I think, really where a goal of connected strategies lies and where the big potential of connected strategy lies, coming from the customer's perspective because, wow, right? My happiness, my willingness to pay goes up if you're not just helping me with a low-level need but if you're now helping me with a bigger need of, for instance, keeping me healthy.

From the firm's perspective, that is really helpful because now I don't have to compete transaction-by-transaction against everyone around the world right now. Once I have you in that relationship, once you trust me, all of a sudden, I can focus my attention much more on making you better rather than just dropping my price again.

But, as the name implies, being a trusted partner means trust. Now let's get back to the data point because, obviously, underlying a lot of this is the data that we are able to gather from the customer throughout these phases of the customer journey. There are really two homogenously important topics here. There is data security and there is data privacy.

The security angle is just, are we protecting your data in a way that no one who shouldn't have access to it gets access to it, but the privacy angle is sort of more broad. It says, are we actually using the data in the way it was intended to? Does the customer actually know how we're going to use the data? Are we just using it to make that customer's life actually better or not?

Clearly, in creating, again, a connected strategy, you're not going to immediately jump to this point of, well, let me be your trusted partner. But I think the way it is sort of going to work out is that a customer says, "Look. You, company, I'll give you a bit of slice of data, and now you show me how you can make my life better. Once you've shown that to me, maybe now I'm willing to give you more data."

I think Amazon is a great example. Amazon, at some point, asked me, "Nicolaj, where do you live and what's your credit card number?" I gave them that information. Then they said, "Okay. Look. Now we've got a button. You just need to click it and everything is done."

I said, "Whoa! Well, okay. Now I've given up a little bit of my privacy. Right now, you know where I live and here is my credit card information, but I really saw my life improve a little bit better."

Now Amazon says, "Great. Now we've got that thing figured out, but now we are delivering it to you and you're never at home. That's a problem. That's a pain point, so give me access to the trunk of your car."

I say, "Well, that's kind of weird, but okay. Maybe I'll give them access to the trunk of my car." Low and behold, now they're delivering stuff to the trunk of my car and another big pain point has been removed. I don't have to go to UPS twice a month to pick up stuff because I was never at home.

Again, I think it is sort of that slow process of, you give me a slice of data and I can really show you how I can make your life better. We are slowly building up that trust.

Of course, trust can be also easily lost. This is why I think data privacy, data security are so important in creating connected strategies.

Michael Krigsman: We have a really interesting question from Twitter. This one is right out of left field. I think it relates to this as well. Arsalan Khan asks the question. He says, "Monopolies don't care about customer experience. Should they?" A monopolist point of view on customer experience. I never heard anybody talk about that before.

Nicolaj Siggelkow: Of course, they do. [Laughter] Now, we could go into a little microeconomics lecture. If you push up the ability to pay, you push up the demand curve, and you will increase your profits. Now, I understand, obviously, where the question is coming from. The questions, I think, are coming a bit more from, "Well, if I'm a monopolist, I have much less incentive, somehow, to invest in things and to be more innovative that might actually allow me to even create higher profits."

That's, I think, what we see sometimes in industries. if you have a very protected industry, I don't feel the competitive pressure to innovate. Let's think about the cab industry, right? The cab industry, basically, in every city was a regulated monopoly to a certain extent. There was just no incentive to innovate. That, I think, again, opened up the room for companies like Uber and Lyft to come in. I think, one the one hand, I completely understand the question, but I think it is really the incentives that competition brings to innovate.

Let me just maybe add one more thing here and that I think is quite important as we're now starting to think about the competitive advantage. We've noted before that the technologies that underly connected strategies are quite often sort of available to everyone. That's, in some sense, good news because you, as a company, you don't have to become a technology company to create a connected strategy. The bad news is, all of your competitors have access to those technologies as well.

I think a lot of these elements of connected strategies will ultimately become table stakes. Everyone will have connectivity. Everyone will have access to a certain amount of data. Everyone will have this expectation of being connected 24/7. A lot of those elements that we're talking about will become table stakes.

Just innovating, just becoming better at what the existing solution is, is actually not enough. Now we have to ask ourselves not how do we beat but, if I'm Uber, how do I beat the cab companies, but how do I beat Lyft? That's a much more difficult question.

Again, as we argue in the book, we really believe it is that learning loop that Christian was talking about, that repeat loop. That is actually possibly the source of sustained competitive advantage because that kind of customer insight, that kind of learning, that is much more difficult to replicate than a particular technology.

Creating Virtuous Cycles with Customers

Michael Krigsman: Christian, what about the notion of building a virtuous cycle with a cycle? Where does that fit in? Also, how do we do that and what are the obstacles that interfere with that?

Christian Terwiesch: It's really building on the part where we were just a moment ago in the discussion. It is that feedback loop. By doing more repeated interaction with a customer, we learn more about that customer. We learn more about customers like that customer, the metadata I mentioned previously.

That is a virtuous cycle in action, right? You go through this. You go through this. You iterate. You iterate. You get better and better. You're both getting a better job of fulfilling that customer's needs. You get entrusted with a bigger, deeper need by that customer. You're going to grab market share, and that is this virtuous cycle in action.

I do agree with the earlier question that there are clearly some concerns on the monopoly platform side. I think this idea, the whole definition of a monopoly or of a company serving a particular market in that space is also, with connected strategies, slightly getting fuzzy. As you're going from solving the problem of selling me a running shoe towards managing my active life, the nature of the industry that is relevant to define economic concepts such as a monopoly is changing. And so, you're really becoming more fuzzy in an area where there are lots of other substitutes for the product or service that you provide. Somebody, even if they have an 80% market share, it's something that we shouldn't really call a monopoly.

Michael Krigsman: This notion of self-renewing interactions that you also talk about, maybe you can elaborate on that one.

Nicolaj Siggelkow: I'm not quite getting self-renewing interactions. Now, there is clearly kind of the sense of, as we are getting more and more information, what happens is if we get a better fit between the needs of the customer and what we're able to provide to the customer, that is again sort of more likely that that customer comes back to us and we have more interactions and we get more data. In some sense, that is that virtuous cycle where connections, in some sense, beget new connections or new interactions over time, both at the level of that customer and, of course, if we're doing a really great job, we should be attracting new customers that, again, give us a larger database to optimize the product offering that we have in the first place.

Michael Krigsman: We're almost out of time, and so I'd like to ask each of you to share your thoughts, share your advice on business leaders who are listening to this conversation and saying, "Yeah, this sounds great. Connected customer relationships are going beyond customer experience." What do they need to do? How do they get on this path?

Christian Terwiesch: Look, Mike. I'm OS professor, not a CS professor, but let me try. [Laughter]

Nicolaj Siggelkow: [Laughter]

Christian Terwiesch: The first thing you need to do is get the book. The second thing that you need to do is get on our website, connectedstrategy.com, where we have lots of extra information for free, videos with the people, a podcast with people that we interviewed as part of our research, case studies filled out. Those are the first steps.

Kidding aside, what this book really does is it's not written as an "understand the world" book. It's written in a very prescriptive way where we have a couple of workshop chapters. At the end of the three parts of each book, there's a workshops chapter. That really walks folks, executives, through the exercise of first understanding what the potential is for a connected strategy. Second, it talks about this connected customer relationships that we talked about on your show today, Mike. Then, third, how do you make it happen on the fulfillment side? How to build a value chain, a supply chain that is leveraging connectivity that you can provide these magical customer experiences without breaking the bank.

Nicolaj Siggelkow: Yeah, we have the great fortune, obviously, of writing the book while teaching the book. That maybe took a bit longer for us to actually finish the book, but it was really very valuable. Teaching the content both to our MBA students, our executive MBA students, other participants of executive education programs here at Wharton.

We were actually really able to road test the various exercises, worksheets that we have in the book to really readdress your question because that is quite often where companies or managers are stuck right now. I have all of this data. I know stuff is happening around me, but how do I make sense of all of these new developments? That was really kind of the purpose of why we wrote the book. We really tried to make it as actionable as possible through these workshop chapters that we have in there.

Obstacles to Customer Experience

Michael Krigsman: As you were talking with companies about customer experience, about these issues, what were the kinds of obstacles that seemed to come up the most?

Christian Terwiesch: I think Nicolaj, earlier on, mentioned this idea of organizational structures within centers. You think about a firm like a Disney. You think about a big retail company where you're having multiple channels that connect to the customers where you might have a website. You might have basically some mobile services. You might have still some brick and mortar activities.

Oftentimes, these things are grown by acquisition and have different IT systems. But even if you figure that out, there is this organizational channel that you provide a great customer service and the store to a customer. That customer comes back online and buys something, but you really don't necessarily know that it's the same customer. Suddenly, you have the person doing the work in the store, but the person in the online channel getting the credit.

These organizational incentives issues that I think are really a big roadblock that keeps many organizations, especially in healthcare these days where, again, you also mentioned the HIPAA regulations. Some organizations have started that journey, but I think we're really only at the beginning of the connected strategy journey.

Nicolaj Siggelkow: Yeah. Just to echo one thing that we've said earlier, I think quite often the obstacle is that firms focus or managers focus too much early on, on technologies. Oh, there are new technologies out there. Let's just put these technologies in. Let's hire an AI guy. Let's put some sensors on our customers, and then we have all of this wonderful data. Then we'll figure out what to do with it. I think, really coming from the other angle, really understanding first the customer, the customer needs.

Now, of course, as we said earlier, that requires us to know what we're actually looking for and, of course, it's not quite that easy. It is much more of an iterative process. As we learn more about customers, we learn more about what kinds of questions we need to ask or you find out new pain points that we never knew about. That's all good, but we really have to put ourselves in the shoes of a customer rather than coming in from the other side just thinking about technology and data.

Michael Krigsman: Would it be accurate to say that if you know what you're looking for that data becomes the proxy for having empathy for the customer? To put it another way, data allows you to gain empathy into the customer because you're looking at their digital tracks.

Christian Terwiesch: The link between data and empathy is, indeed, a good one. The empathy masters most at this fuzzy front-end of the customer journey when the needs might potentially still be late and even the customer themselves are not aware of the needs. If you think, again, about the world of healthcare, there you can start tracking data about body measurements, what's happening in my gut, what's happening in my brain, what's happening with my skin temperature. All of those things are things that we are currently and we will increasingly be able to measure.

As, Mike, your question suggests, I think these are very good proxies for empathy. You still have to have the empathy in the first place to know which sensors make the most sense, which variables to connect, but I like the idea of using this type of early data in the consumption chain in the customer journey to get things that previously were disconnected in this empathy space.

Michael Krigsman: We have literally about two minutes left, and so let me ask each of you a hard question. Can you summarize, just in literally a sentence or two, everything you know about this topic? [Laughter]

Nicolaj Siggelkow: Buy this book, right? [Laughter]

Michael Krigsman: You guys are university professors. In fact, I would have thought you're marketers. No, but seriously, go on. [Laughter]

Nicolaj Siggelkow: The synopsis here, a connected strategy has two different pieces to it. On the one hand, there is creating connected customer relationships. That requires you to recognize a need, to transform that information into a request for a particular solution, to respond to that particular request, and then to repeat that interaction, again and again, to learn more and more about this and to have a smoother loop.

On the other hand, you have a connected delivery model that is composed again of, actually, three different parts. There is a connection architecture. There is a revenue model and a technology infrastructure. All of these come together to help affirm, to create a higher willingness to pay in the customer at, actually, a lower cost.

Christian Terwiesch: I get 20 seconds. I would say there's a what, there's a how. What does a customer want? What customer experiences do you want to provide? That's the "what." There is the "how." How are you going to go about this? Both the what and the how will get a lot better with connectivity that allows us to break the tradeoff that we've always had between the what, the how, this efficiency frontier shifted out, and to get better service for less money.

Michael Krigsman: All right. Well, we are out of time. It's been a very, very fast and very interesting conversation. We've been speaking with Nicolaj Siggelkow and Christian Terwiesch. I've probably mangled both your names, and I apologize about that. They are the authors of Connected Strategy. It's a very, very great book about the next evolution of customer experience into customer relationships based on trust and based on various types of connections.

Once again, please subscribe on YouTube and subscribe to our newsletter. Hit the little button at the top where it says "Subscribe" and you can subscribe to our newsletter and keep up-to-date. Our next show, we are speaking with the chief information officer of Cisco Systems about the evolution of the CIO role. Thanks so much for watching, everybody. Thank you to my two guests. I really appreciate, gentlemen, your being here and taking the time. Thank you very, very much.

Nicolaj Siggelkow: Thank you.

Christian Terwiesch: Thank you, Michael.

Michael Krigsman: Have a great week, everybody, and we'll see you next time. Bye-bye.

Michael Krigsman: What's next for customer experience? That's our topic today. We are speaking with two professors from Wharton, Nicolaj Siggelkow and Christian Terwiesch, authors of the book Connected Strategy. Gentlemen, welcome to CXOTalk. I'm so thrilled for you to be here.

Nicolaj Siggelkow: Thank you for having us.

Christian Terwiesch: It's great to be on your show, Michael.

Michael Krigsman: As a way to start, I'll just ask each of you to briefly introduce yourselves.

Nicolaj Siggelkow: Let me start. My name is Nicolaj Siggelkow. I'm a professor of strategy here at the Wharton School. Actually, both Christian and I joined at the same time about 21 years ago. As you will probably tell from our accents, we are both originally from Germany as well, but we've been in this country for a long time and have been here at Wharton and are really enjoying our time here.

Christian Terwiesch: My name is Christian Terwiesch. I'm going to be the other actor here in this German comedy. I've been with Wharton, with Nicolaj, for 21 years. I also have a secondary appointment at the School of Medicine and so, when we talk about customer experience, for me that oftentimes also means patient experience.

What is Customer Experience?

Michael Krigsman: As we have this conversation, we should definitely drill down into patient experience. I think it's a great example. Nicolaj, let me begin with you and ask, when we talk about customer experience, it's such a vague term. What actually does it mean and why does it matter?

Nicolaj Siggelkow: I think the interesting thing is when you ask managers to think about the customer experience or what other value drivers that customers have for their firm's product or service, they immediately go to tangible or intangible aspects about their product: the quality of the product, the speed, the size, maybe the brand. What is really important to understand about a customer experience is that there is a whole customer journey a customer has with you.

It starts from the moment a customer becomes even aware of a need to understanding what are the options out there to ordering, to paying, to receiving. Then, actually, only I'm experiencing the product and then also some after sales service support. It's a whole customer journey and what we are talking about in this book are the various ways of how really to think about customer experiences in a much broader sense than just about the product that you are getting.

Christian Terwiesch: Yeah, to put this in a medical context, it's really not what just happens between you and the doctor or while you, as the patient, are in the hospital. It happens in the time that precedes you coming to the hospital. That's where you are hopefully kept healthy and it continues when you're being discharged. I think the idea of being connected is a very powerful concept that you're not just doing a good job in the moment of the experience of the service or product but really think about this whole customer journey.

Michael Krigsman: The notion of customer journey, can you say that that is the fundamental building block of customer experience? Would that be an accurate way to put it?

Christian Terwiesch: From a customer experience perspective, yes. We think about the customer journey starting with the revelation of the need, the customer, the patient becoming aware of the need him or herself, going through that process, the cognitive process of what you're going to do about the fulfillment, leading ultimately towards a very specific request to a company, do something for me, and the response from that company saying, "Here is how I can help you." In the spirit of what we call a Connected Strategy, there is this customer-centric piece, but then there is also a whole fulfillment piece and how you connect with your value chain of making the connected customer experience happen.

Michael Krigsman: It's the product. It's the journey. But then when you talk about the connected customer strategy, maybe elaborate on what you mean by that network.

Nicolaj Siggelkow: There are connections on two different sides, right? There is the one fundamental way of what connected strategies do is to really reshape the way you're interacting with your customer or your patient. Rather than having these few episodic interactions, to have a much deeper relationship that potentially, for instance, allows you to anticipate needs.

Let's keep going with a medical example. Quite often, when a patient is aware of a need, it's already too late or really inefficient. I'm already lying on the ground having a heart attack. That is probably not the most efficient time to become aware of the need and for the whole system to solve that problem. By having a much deeper connection, I might be able to anticipate the need.

Now, even if the customer knows I have a need, the customer may not really know what is actually the best option of how to fulfill that need. Now, again, I can help that customer. If I know a lot about that customer by having, for instance, a good data stream from the customer to me, I might really be helpful in helping that customer understanding what are all the options out there. For instance, you have some heart palpitations. What should you be doing and what might be the best solution for you?

The connectivity part on the customer side is really eventually making that customer journey really, really smooth and frictionless and making it way more efficient for us to provide and for the customer to value more. That's one part of connectivity or parted of connected strategy.

The other part of the connected strategy is, how do we actually create these connected customer relationships in an efficient way? Again, using healthcare, it's very easy how you can increase the value for a customer. You just put a nurse and a doctor next to the person 24/7, right? [Laughter] Then the customer would be rather happy, or that patient would be rather happy, but it's really, really inefficient to do so.

The second part of our book and of the framework is really thinking about these different connected delivery models. That may require us to connect various players in our ecosystem that previously have not been connected. We have connectivity on both, the side of the customer and on the side of the delivery model.

Michael Krigsman: This notion, again, of customer experience, what would be even the right term? I was going to say a good, authentic, positive customer experience, a deep customer experience. I'll let you guys tell me the right term. But it then requires tendrils, so to speak, reaching out that relate to the customers' environment, to the customers' psychology.

Christian Terwiesch: I think, Michael, you're asking a deep question there. I think it's helpful to backpedal a little bit and just realize that customers neither want products or services the customers don't need, whether it's the healthcare space, if you go a little bit maybe into the active lifestyle, into sports. You might say customers have a need for a running shoe. That's one way of framing the problem.

Really, what they want to do is run. Many of them want to run because they want to stay healthy. You can think about deeper and deeper needs.

When you think about the company who is kind of sitting on the other side who is trying to help them fulfill their needs, if you are just in the running shoe business, you're competing on a very transactional basis with a customer and the customer is only entrusting you at a very transactional, superficial level. If you become their partner for life that keeps me healthy, that keeps me active in life, you have a much better competitive position. You're adding much bigger value to the customer in many more ways than just selling a great shoe.

Customer Experience and Internal Employees

Michael Krigsman: We have a question from Twitter. Arsalan Khan is asking about the mix between external customers and internal customers, namely employees. When I have spoken with a number of CEOs on this show of large organizations, oftentimes they raise the fact that good customer experience has to begin with internal employees. Do you have any thoughts on that?

Nicolaj Siggelkow: Okay. Actually, I thought the question was going a slightly different direction because the intriguing thing is, we can think about a connected strategy, not necessarily just between a firm and their customers, and we can sometimes also think about internal connected strategies within an organization. If I'm the legal department in an organization, though I have few episodic interactions, do I just basically wait for someone to come with a problem to me and then I help them or am I actually internally connected so I can anticipate the needs of my clients within my own organization? We are actually seeing some very interesting ways of how firms are thinking about connected strategies inside their organizations. That's one piece.

Now, the other piece that maybe that question is really getting at is another really important point that connected strategies, of course, use technologies. Quite often, new technologies is what enables connected strategies to be implemented, but technologies are usually, actually, available to everyone. That's quite often not the source of difficulty of implementing connected strategies. The real difficulty, quite often, is indeed organizational, and be that at the level of the employee and the level of information exchange within the organizations.

Coming just a little bit back to the question you asked earlier about how to think about experiences and then what's this other term, and so we could call this other term actually a relationship. That's actually why we are thinking about it as connected customers' relationships.

There are a series of experiences that you have. Again, each experience we want to make as smooth and as easy as possible with you as a customer. But to really, eventually, get to this relationship piece, we have to learn whenever we interact with you and become sort of better and better at understanding your needs and fulfilling them. We need to move slowly through experiences to really then being able to address these more fundamental needs that Christian was talking about in having a trusted relationship with our customer.

Trusted Relationships and Customer Experience

Michael Krigsman: Christian, trusted relationship, is that the fundamental building block, can we say, that we're going for?

Christian Terwiesch: It's a fundamental building block. In our framework, there's a little journey from the customer experience side. It starts with recognizing the need, so recognize I need something or the firm recognizes I need something. At some point, that recognize is codified in some form of a request. I want a new toothbrush. I might have the healthcare system intervene and send me an ambulance. Recognize requests, and that is the response.

The firm sits on the other side. They get this data and send the response to my need. But the value and the relationship that Nicolaj really emphasizes is recognize, request, respond, repeat. You start over again, and that builds two things. That builds the trust that, Michael, in your question you were after, but it also really builds a form of efficiency that allows us to break this tradeoff between the willingness to pay, the customer delight, the customer happiness on the one side and the fulfillment costs on the other side.

By repeatedly doing that loop, I can customize. I get to know you better, Michael, and I can customize the products and services to you and your specific need. Even better, what I can do is I can learn. We call this meta-level data and meta-learning. I can learn about the population in your market segment. People like you, Michael. That allows us to provide new products or services, change our assortments, and that makes everybody better off. Absolutely, this repeat, I mention, is critical.

Customer Experience in Healthcare (Patient Experience)

Michael Krigsman: We have a really interesting question from Twitter. I think this probably is for Christian because of the healthcare angle. Sal Rasa says, "How do current HIPAA and other government regulations inhibit the flow of critical patient information and does this inhibit then customer experience? How can communication make that customer or patient experience better?"

Christian Terwiesch: Clearly, in the healthcare world, a lot of the connectivity examples that we've seen in other industries, if you think about Disney with their MagicBand, if you think about the relationship that we have with Amazon, those companies are five, ten years ahead of the healthcare space because the healthcare space is heavily regulated. That regulation, we can always kind of point fingers at legislative forces and complain about them. By and large, these regulations are, I would argue, a good thing. You see, increasingly, healthcare systems doing the type of things that we're talking about.

Nicolaj and I are working for the University of Pennsylvania. That is where the Wharton School is hosted. We had a very big healthcare system called Penn Medicine. Increasingly, you see the big systems, the big infrastructure providers, like an Epic or so, basically building the building blocks that allow for a secure exchange of this type of HIPAA information, of the electronic health record for the patient where everything is becoming digital. The infrastructure is there, and I don't think I have to be a prophet to predict that, I the next five years, we'll see a massive explosion of these types of connected services in healthcare.

Michael Krigsman: You were talking earlier about this notion of efficiency and customers' willingness to pay and then the cost of fulfillment. Would you elaborate on that? That seems like it's another really crucial point.

Nicolaj Siggelkow: I think about, how do we create value in the eyes of the customer? Different customers will have different value drivers. You can sort of summarize all of that in the concept we might call a willingness to pay or the perceived value that the customer has from getting a particular product and service. That, for instance, can be a function of the product attributes but, overall, again, thinking about willingness to pay drives along the entire kind of customer journey is really what opens up this thinking around more connectivity. That's the value that we are creating in the customer's eye.

Then there is, on the other hand, a cost that we have of creating that particular experience, and so there is a tradeoff. Again, as I said with the example of the doctor and the nurse who are standing right next to me, my willingness to pay for that service is relatively high or, let's put it this way, the value that I'm getting out of that particular service is really high. But also, the cost of providing that service is really high.

Conversely, I could have only telemedicine and I never see anyone. Whatever it is, I'll have to maybe inject myself. That's a really low-cost solution, but the quality of that is not very high because I might not actually hit my vein if I do this. There is usually a tradeoff, and so we're thinking about this as a frontier, a certain efficiency frontier and an industry that describes that tradeoff between the willingness to pay and the fulfillment cost.

What has been quite interesting is that evolutions and developments around connected strategies really have allowed firms to push out that frontier, to be able to actually create a service or product that customers like more than the existing solution, and the firm is actually able to create that superior experience at a lower cost. That, of course, is very disruptive because now the firm comes in that has a better product and they can probably offer it at a lower price because their cost is even lower.

A good example might be Uber or Lyft. All of a sudden, customers say, "Hey, that's actually better than a cab experience," and Uber and Lyft can create these rides at a lower unit cost than a cab company has. That's why there's disruption.

From the perspective of the existing firms in the industries, these new connected strategies look like, "Wow!" kind of blown out of all this tradeoff. Now, of course, that tradeoff still exists, but now it exists at a higher level, right? We have pushed out that frontier. That is kind of the underlying, we call, "magic" of the connected strategy that sometimes actually allows you to do both of these things and that creates disruption.

Christian Terwiesch: Yeah, let me add to that. When I started working in healthcare some 20 years ago, I was initially labeled an evil person, people said, the productivity of the doctor fulfillment because their perception was that, well, what would do as an operations professor, I make things cheaper. I would lower fulfillment costs. In the spirit of the tradeoff that Nicolaj was just talking to between the willingness to pay, the quality of care, and the efficiency and proof of efficiency, the default assumption was that, well, of course, quality has to come down.

The idea of operations management is, by being smart, I can improve by taking out cancellations and no-shows, by freeing up the provider of some unnecessary work. I can shift that frontier and make things better. Better quality at lower cost.

But in operations management, I've been frustrated with that over the years. You can only push the current system so hard. You can only take that much waste out of the system. What I'm excited about our work here on connected strategy is really these game-changers, these forces of disruption in not just shifting the frontier by a little bit, but just totally redefining the industry. I think that is the value proposition of our work.

Technology is Not Customer Experience 

Michael Krigsman: Would it be correct to say that the value proposition of the book is, how do we use technology or other means to push that efficiency frontier out so that we're delivering better experiences at a lower cost for customers to the point where it becomes, as you said, disruptive? Is that an accurate way of saying it?

Christian Terwiesch: I think so, but I want to go back to something that Nicolaj said. I think he was about to say that.

Nicolaj Siggelkow: [Laughter]

Christian Terwiesch: The same thing, right? We're alike a little when we hear, like, how to use technology. The bottleneck here is not technology. The technology it out there. We're living in the world of sensors, smartphones, connectivity. The technology is there. The limitation is our ability to imagine a new user experience partly because we never had so many degrees of freedoms as managers.

We can do now things that were never possible 20, 30, 40 years ago. We can do these things, so we're limited by our imagination. We're limited by our current way of doing things. We hold a certain set of assets, resources and, again, we don't see how we could reconnect them in new ways to create the fulfillment. I think about this more as a business model of innovation but, short of that, Michael, I thought your summary of the book was pretty good.

Michael Krigsman: That's really interesting. Okay. When you start pushing that efficiency curve and rebalancing the cost of fulfillment -- I was going to say the cost of delivery -- with the customer's willingness to pay, technology is not necessarily the driver, but it's rethinking the business model. That becomes the underlying driver of your ability to make this kind of change, disruptive change.

Nicolaj Siggelkow: Technology, of course, plays a role. Again, let's think about Lyft or Uber. Clearly, without cell phones, without GPS, without Google Maps, that would not work. It's very hard to coordinate, understand who are the customers out there, who are people who have a car. Without those technologies, that business model would not work.

At the same time, it was not Uber who developed all of these technologies. They didn't say, "Okay, in order for my business model to work, I now need to create a maps product. Now I need to create a way of connecting people via some gadget that connects somehow wirelessly."

No. Those technologies were out there, and so they said, "If we can put these technologies together, all of a sudden we can come up with a business model that can really create disruption. That's kind of the point. Certainly, technologies are important, but they're quite often out there, so it's the business model.

Now, the other part, and we started talking about this a little bit earlier, is really this notion of the organizational change that may have to happen. Fundamentally, again, what connected strategies are about is basically this notion of customer centricity. You really want to think about one particular customer. You want to make that customer really happy by understanding the various pain points this customer has along the customer journey or the particular willingness to pay drives for that customer, so we need to understand that customer really, really well. But, quite often, we are actually not organized that way.

When we talk to the folks at Disney who create the MagicBand, they said, "Of course we want to create the seamless customer experience from the moment you go online and you want to think about a vacation. You book your vacation. You get on the plane. You get out in Orlando. You somehow get to the hotel. You check into your hotel room. You get to the theme park. You get on some rides. You get some food. You go home."

All of that should be one consistent, seamless customer experience. From a certain aspect, it is because it is one person experiencing all of that. The problem is really that that person has to deal and navigate through the organizational structure of Disney. Once in a while, I have to interact with the online division. Then I have to interact with the hotel division. Then I have to interact with the restaurant division. It's basically left up to the customer to stitch together these things and somehow understand how Disney, the organization, is working.

They said, "That we have to change. We have to change the information flow within our organization so that we all understand and learn about that particular customer no matter what touchpoint we have for that customer, be it online, be it offline, be it in the theme park, in the restaurant. That's really tough. That's really difficult, but that's more of an organizational change than just a technology change.

Role of Data in Creating Connected Customer Experiences

Michael Krigsman: Organizational change is such an important one, but I'm also mindful of the time. You've described it very eloquently. Let me shift gears a little bit and ask you about the role of data in being able to create these kinds of connected customer experiences that you're describing.

Christian Terwiesch: Data is created as you go through this loop to recognize the need and form a request. Either the firm forms a request or the customer forms a request. The firm responds. Recognize the request, respond, repeat.

As we're going through that cycle, data is like an exhaust. It's like a byproduct. It's generated. What do you do with that data?

The first thing that you do is you learn about Nicolaj over time. You learn his preferences. You learn that he likes German comedies, if there is such a thing. You learn the food preference over time. You basically get better and better at serving Nicolaj.

But there is not just Nicolaj. There are many other people like him. Sorry, he is unique, of course, but there are many people in that market segment.

Nicolaj Siggelkow: [Laughter]

Christian Terwiesch: By having learned about all of those, you can start finding opportunities. You start creating new series, new jokes, new comedies. You start providing new meals at the restaurant. That allows you again to shift that frontier because that is data that allows you to take the most advantage of the expensive resources that you have and to gain insights that your competitors don't have.

Nicolaj Siggelkow: I would just add because I think one misconception I think we tried to remove so far was that connected strategies is all about technology. I think the second misconception is, connected strategies is all about data. Data by itself actually doesn't do anything. Lots of firms have lots of data. I know now every click that you've ever done on your webpage, and now I have gigabytes of data, but I have no idea what to do with it.

I think what we are really pushing here in the book is, quite often the way to think about it is coming back to this idea about the customer experience. Really ask what are the pain points, what are the value drivers, and then you can ask what kind of data would I need to relieve that pain point, to delight the customer even more.

Really, the fundamental thing is about learning. Of course, learning requires data. Data, of course, is important, but it is really that learning that is the important piece.

That actually, again, doesn't happen by itself. Just having lots of sensors out there and receiving gigabytes of data is not going to create a connected strategy. It's then asking, what do we need to do with this? That's really kind of that learning loop that Christian was talking about, both learning at the level of the individual and learning at the level of the population.

Michael Krigsman: But that implies then that you know going in what are the questions that you need to ask, "What do we need to learn?" which then requires a deeper kind of strategy.

Christian Terwiesch: Yeah, I like the way that you put it. I think there is big data and there is small data. I think any good strategy formation is not just done by an executive sitting in a corner office looking through big databases using Excel or Tableau or some kind of fancy algorithm. You only have to get a sense of what are the insights from talking to the customers. What are the user experiences that they want?

We find it helpful, in the spirit of customer experience, to distinguish situations where the customer just wants something. They know that they want it. They know what they want. They just want to press a button.

Really think Uber. I know I want to get home at 3:00 p.m. today. I know where I live. Just make it as simple as possible.

Then we have something that we call a curated offering. The pain points really have to do with the fact that I really don't quite know what I want. I know that I'm hungry, but I don't know where I want to eat and what I would enjoy. I know I want to watch a comedy tonight, but I don't know what the recent releases are. I know I want to get a pay raise, but I don't know what to study in accounting.

The next level up is, I know I want to stay healthy, but sometimes I'm a little reluctant. I'm a little lazy. I'm a little myopic. Then I'm looking for somebody who gives me a little kick in the rear to just make me go and encourages me.

Then, in the very extreme situation, I might really want to outsource, to delegate a problem that I have, like balancing my portfolio or tracking the safety of my house. I just want to say, "You, company, you deal with all of that."

Those are four very different user experiences that we described in the book. They require very different data and they do require very different strategies. It is your role as an executive to have the vision to ask yourself, "What does a particular customer really want along that spectrum?"

Use Data to Create Connected Strategies

Michael Krigsman: We have another question from Twitter, a really interesting question; actually, two from Gus Bekdash. The first question he asks is, "AI and digitalization have enabled enterprises to present new faces and collect new data. How does that data, that new type of data, affect customer relationships?" Then he goes on to ask about what do enterprises owe their customers regarding how they use that data.

What I'll ask you then is, how does data, this new type of data, affect the ability to have change evolve these customer relationships? Then, rather than talking about privacy so much, if you can then kind of shift into the notion of trust.

Nicolaj Siggelkow: That's a really important point, right? We talked a little bit earlier about how firms would like to transform experiences into relationships, kind of slowly move up that hierarchy of needs. I'm not just helping you deal with your cardiac problem right now. I try to keep you healthy.

That move towards becoming more a trusted advisor or having a trusted relationship is, I think, really where a goal of connected strategies lies and where the big potential of connected strategy lies, coming from the customer's perspective because, wow, right? My happiness, my willingness to pay goes up if you're not just helping me with a low-level need but if you're now helping me with a bigger need of, for instance, keeping me healthy.

From the firm's perspective, that is really helpful because now I don't have to compete transaction-by-transaction against everyone around the world right now. Once I have you in that relationship, once you trust me, all of a sudden, I can focus my attention much more on making you better rather than just dropping my price again.

But, as the name implies, being a trusted partner means trust. Now let's get back to the data point because, obviously, underlying a lot of this is the data that we are able to gather from the customer throughout these phases of the customer journey. There are really two homogenously important topics here. There is data security and there is data privacy.

The security angle is just, are we protecting your data in a way that no one who shouldn't have access to it gets access to it, but the privacy angle is sort of more broad. It says, are we actually using the data in the way it was intended to? Does the customer actually know how we're going to use the data? Are we just using it to make that customer's life actually better or not?

Clearly, in creating, again, a connected strategy, you're not going to immediately jump to this point of, well, let me be your trusted partner. But I think the way it is sort of going to work out is that a customer says, "Look. You, company, I'll give you a bit of slice of data, and now you show me how you can make my life better. Once you've shown that to me, maybe now I'm willing to give you more data."

I think Amazon is a great example. Amazon, at some point, asked me, "Nicolaj, where do you live and what's your credit card number?" I gave them that information. Then they said, "Okay. Look. Now we've got a button. You just need to click it and everything is done."

I said, "Whoa! Well, okay. Now I've given up a little bit of my privacy. Right now, you know where I live and here is my credit card information, but I really saw my life improve a little bit better."

Now Amazon says, "Great. Now we've got that thing figured out, but now we are delivering it to you and you're never at home. That's a problem. That's a pain point, so give me access to the trunk of your car."

I say, "Well, that's kind of weird, but okay. Maybe I'll give them access to the trunk of my car." Low and behold, now they're delivering stuff to the trunk of my car and another big pain point has been removed. I don't have to go to UPS twice a month to pick up stuff because I was never at home.

Again, I think it is sort of that slow process of, you give me a slice of data and I can really show you how I can make your life better. We are slowly building up that trust.

Of course, trust can be also easily lost. This is why I think data privacy, data security are so important in creating connected strategies.

Michael Krigsman: We have a really interesting question from Twitter. This one is right out of left field. I think it relates to this as well. Arsalan Khan asks the question. He says, "Monopolies don't care about customer experience. Should they?" A monopolist point of view on customer experience. I never heard anybody talk about that before.

Nicolaj Siggelkow: Of course, they do. [Laughter] Now, we could go into a little microeconomics lecture. If you push up the ability to pay, you push up the demand curve, and you will increase your profits. Now, I understand, obviously, where the question is coming from. The questions, I think, are coming a bit more from, "Well, if I'm a monopolist, I have much less incentive, somehow, to invest in things and to be more innovative that might actually allow me to even create higher profits."

That's, I think, what we see sometimes in industries. if you have a very protected industry, I don't feel the competitive pressure to innovate. Let's think about the cab industry, right? The cab industry, basically, in every city was a regulated monopoly to a certain extent. There was just no incentive to innovate. That, I think, again, opened up the room for companies like Uber and Lyft to come in. I think, one the one hand, I completely understand the question, but I think it is really the incentives that competition brings to innovate.

Let me just maybe add one more thing here and that I think is quite important as we're now starting to think about the competitive advantage. We've noted before that the technologies that underly connected strategies are quite often sort of available to everyone. That's, in some sense, good news because you, as a company, you don't have to become a technology company to create a connected strategy. The bad news is, all of your competitors have access to those technologies as well.

I think a lot of these elements of connected strategies will ultimately become table stakes. Everyone will have connectivity. Everyone will have access to a certain amount of data. Everyone will have this expectation of being connected 24/7. A lot of those elements that we're talking about will become table stakes.

Just innovating, just becoming better at what the existing solution is, is actually not enough. Now we have to ask ourselves not how do we beat but, if I'm Uber, how do I beat the cab companies, but how do I beat Lyft? That's a much more difficult question.

Again, as we argue in the book, we really believe it is that learning loop that Christian was talking about, that repeat loop. That is actually possibly the source of sustained competitive advantage because that kind of customer insight, that kind of learning, that is much more difficult to replicate than a particular technology.

Creating Virtuous Cycles with Customers

Michael Krigsman: Christian, what about the notion of building a virtuous cycle with a cycle? Where does that fit in? Also, how do we do that and what are the obstacles that interfere with that?

Christian Terwiesch: It's really building on the part where we were just a moment ago in the discussion. It is that feedback loop. By doing more repeated interaction with a customer, we learn more about that customer. We learn more about customers like that customer, the metadata I mentioned previously.

That is a virtuous cycle in action, right? You go through this. You go through this. You iterate. You iterate. You get better and better. You're both getting a better job of fulfilling that customer's needs. You get entrusted with a bigger, deeper need by that customer. You're going to grab market share, and that is this virtuous cycle in action.

I do agree with the earlier question that there are clearly some concerns on the monopoly platform side. I think this idea, the whole definition of a monopoly or of a company serving a particular market in that space is also, with connected strategies, slightly getting fuzzy. As you're going from solving the problem of selling me a running shoe towards managing my active life, the nature of the industry that is relevant to define economic concepts such as a monopoly is changing. And so, you're really becoming more fuzzy in an area where there are lots of other substitutes for the product or service that you provide. Somebody, even if they have an 80% market share, it's something that we shouldn't really call a monopoly.

Michael Krigsman: This notion of self-renewing interactions that you also talk about, maybe you can elaborate on that one.

Nicolaj Siggelkow: I'm not quite getting self-renewing interactions. Now, there is clearly kind of the sense of, as we are getting more and more information, what happens is if we get a better fit between the needs of the customer and what we're able to provide to the customer, that is again sort of more likely that that customer comes back to us and we have more interactions and we get more data. In some sense, that is that virtuous cycle where connections, in some sense, beget new connections or new interactions over time, both at the level of that customer and, of course, if we're doing a really great job, we should be attracting new customers that, again, give us a larger database to optimize the product offering that we have in the first place.

Michael Krigsman: We're almost out of time, and so I'd like to ask each of you to share your thoughts, share your advice on business leaders who are listening to this conversation and saying, "Yeah, this sounds great. Connected customer relationships are going beyond customer experience." What do they need to do? How do they get on this path?

Christian Terwiesch: Look, Mike. I'm OS professor, not a CS professor, but let me try. [Laughter]

Nicolaj Siggelkow: [Laughter]

Christian Terwiesch: The first thing you need to do is get the book. The second thing that you need to do is get on our website, connectedstrategy.com, where we have lots of extra information for free, videos with the people, a podcast with people that we interviewed as part of our research, case studies filled out. Those are the first steps.

Kidding aside, what this book really does is it's not written as an "understand the world" book. It's written in a very prescriptive way where we have a couple of workshop chapters. At the end of the three parts of each book, there's a workshops chapter. That really walks folks, executives, through the exercise of first understanding what the potential is for a connected strategy. Second, it talks about this connected customer relationships that we talked about on your show today, Mike. Then, third, how do you make it happen on the fulfillment side? How to build a value chain, a supply chain that is leveraging connectivity that you can provide these magical customer experiences without breaking the bank.

Nicolaj Siggelkow: Yeah, we have the great fortune, obviously, of writing the book while teaching the book. That maybe took a bit longer for us to actually finish the book, but it was really very valuable. Teaching the content both to our MBA students, our executive MBA students, other participants of executive education programs here at Wharton.

We were actually really able to road test the various exercises, worksheets that we have in the book to really readdress your question because that is quite often where companies or managers are stuck right now. I have all of this data. I know stuff is happening around me, but how do I make sense of all of these new developments? That was really kind of the purpose of why we wrote the book. We really tried to make it as actionable as possible through these workshop chapters that we have in there.

Obstacles to Customer Experience

Michael Krigsman: As you were talking with companies about customer experience, about these issues, what were the kinds of obstacles that seemed to come up the most?

Christian Terwiesch: I think Nicolaj, earlier on, mentioned this idea of organizational structures within centers. You think about a firm like a Disney. You think about a big retail company where you're having multiple channels that connect to the customers where you might have a website. You might have basically some mobile services. You might have still some brick and mortar activities.

Oftentimes, these things are grown by acquisition and have different IT systems. But even if you figure that out, there is this organizational channel that you provide a great customer service and the store to a customer. That customer comes back online and buys something, but you really don't necessarily know that it's the same customer. Suddenly, you have the person doing the work in the store, but the person in the online channel getting the credit.

These organizational incentives issues that I think are really a big roadblock that keeps many organizations, especially in healthcare these days where, again, you also mentioned the HIPAA regulations. Some organizations have started that journey, but I think we're really only at the beginning of the connected strategy journey.

Nicolaj Siggelkow: Yeah. Just to echo one thing that we've said earlier, I think quite often the obstacle is that firms focus or managers focus too much early on, on technologies. Oh, there are new technologies out there. Let's just put these technologies in. Let's hire an AI guy. Let's put some sensors on our customers, and then we have all of this wonderful data. Then we'll figure out what to do with it. I think, really coming from the other angle, really understanding first the customer, the customer needs.

Now, of course, as we said earlier, that requires us to know what we're actually looking for and, of course, it's not quite that easy. It is much more of an iterative process. As we learn more about customers, we learn more about what kinds of questions we need to ask or you find out new pain points that we never knew about. That's all good, but we really have to put ourselves in the shoes of a customer rather than coming in from the other side just thinking about technology and data.

Michael Krigsman: Would it be accurate to say that if you know what you're looking for that data becomes the proxy for having empathy for the customer? To put it another way, data allows you to gain empathy into the customer because you're looking at their digital tracks.

Christian Terwiesch: The link between data and empathy is, indeed, a good one. The empathy masters most at this fuzzy front-end of the customer journey when the needs might potentially still be late and even the customer themselves are not aware of the needs. If you think, again, about the world of healthcare, there you can start tracking data about body measurements, what's happening in my gut, what's happening in my brain, what's happening with my skin temperature. All of those things are things that we are currently and we will increasingly be able to measure.

As, Mike, your question suggests, I think these are very good proxies for empathy. You still have to have the empathy in the first place to know which sensors make the most sense, which variables to connect, but I like the idea of using this type of early data in the consumption chain in the customer journey to get things that previously were disconnected in this empathy space.

Michael Krigsman: We have literally about two minutes left, and so let me ask each of you a hard question. Can you summarize, just in literally a sentence or two, everything you know about this topic? [Laughter]

Nicolaj Siggelkow: Buy this book, right? [Laughter]

Michael Krigsman: You guys are university professors. In fact, I would have thought you're marketers. No, but seriously, go on. [Laughter]

Nicolaj Siggelkow: The synopsis here, a connected strategy has two different pieces to it. On the one hand, there is creating connected customer relationships. That requires you to recognize a need, to transform that information into a request for a particular solution, to respond to that particular request, and then to repeat that interaction, again and again, to learn more and more about this and to have a smoother loop.

On the other hand, you have a connected delivery model that is composed again of, actually, three different parts. There is a connection architecture. There is a revenue model and a technology infrastructure. All of these come together to help affirm, to create a higher willingness to pay in the customer at, actually, a lower cost.

Christian Terwiesch: I get 20 seconds. I would say there's a what, there's a how. What does a customer want? What customer experiences do you want to provide? That's the "what." There is the "how." How are you going to go about this? Both the what and the how will get a lot better with connectivity that allows us to break the tradeoff that we've always had between the what, the how, this efficiency frontier shifted out, and to get better service for less money.

Michael Krigsman: All right. Well, we are out of time. It's been a very, very fast and very interesting conversation. We've been speaking with Nicolaj Siggelkow and Christian Terwiesch. I've probably mangled both your names, and I apologize about that. They are the authors of Connected Strategy. It's a very, very great book about the next evolution of customer experience into customer relationships based on trust and based on various types of connections.

Once again, please subscribe on YouTube and subscribe to our newsletter. Hit the little button at the top where it says "Subscribe" and you can subscribe to our newsletter and keep up-to-date. Our next show, we are speaking with the chief information officer of Cisco Systems about the evolution of the CIO role. Thanks so much for watching, everybody. Thank you to my two guests. I really appreciate, gentlemen, your being here and taking the time. Thank you very, very much.

Nicolaj Siggelkow: Thank you.

Christian Terwiesch: Thank you, Michael.

Michael Krigsman: Have a great week, everybody, and we'll see you next time. Bye-bye.