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November 25, 2019
Innovating your business model requires a deep knowledge of customers. You must understand what your customers want, and in particular, the main steps or activities they undertake in order to satisfy their desires. You need to understand their value chain.
Traditional companies in these industries have enabled customers to conduct most if not all consumption activities in partnership with them as customers go about acquiring goods and services. These companies bind together as a single “chain” all the steps that consumers undertake in order to acquire products and services. In today’s new wave of disruption, upstart firms are breaking apart these chains, offering customers the chance to fulfill just one or a few activities with them, and leaving incumbents to fulfill the rest. I call this process of breaking apart the chain of consumption
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It follows that incumbents seeking to master it should embrace a new strategic framework. While frameworks such as SWOT analysis,*2 game theory, and even Michael Porter’s Five Forces proved extremely useful for companies in the 1980s, 1990s, and early 2000s, the nature of competition has changed. Most industries used to have only two or at most a few major global players. Today industries contain many competitors, mostly small ones acting globally. Game theory loses much of its value when one larger, more predictable player has to play a strategic “chess match” with not one, not two, but
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As a rule, these traditional strategy frameworks tend to be firm-centric, oriented toward what’s best for the company relative to its competitors. But since the new wave of digital disruption is driven by customers, a company needs new frameworks and tools that focus primarily on them.
When I use the term “disruption,” I am referring to an abrupt and sizable change of market shares among participants in an industry.
“customer value chain” (CVC) as the series of activities that customers perform in order to fulfill their needs and wants. These activities include searching for, evaluating, purchasing, using, and disposing of products.
Yet technological innovation alone didn’t save them. It likely won’t save your business, either. Your fate lies in the hands of customers. So let’s understand the logic of their needs and wants. By doing so, we can devise reliable strategies and tools for directly managing disruption to their advantage, and indirectly to yours as well.
Amazon’s app came into play only once a customer had finished comparison shopping and was looking to make a purchase. In a sense, Amazon and Best Buy were sharing customers. This was a different type of competition, one that big-company executives were not used to seeing and responding to.
Traditionally, incumbents provide value across the multiple stages of the customer’s value chain. However, value is never equally distributed throughout the stages of the CVC. No matter how great the TV commercial is, it is never as good as the show I chose to watch. And in some cases, people value different stages of the process differently.
FIGURE 1.2 EXAMPLES OF DECOUPLED ACTIVITIES AND THEIR DISRUPTORS Source: Adapted from Thales S. Teixeira and Peter Jamieson, “The Decoupling Effect of Digital Disruptors,” European Business Review, July–August 2016, 17–24.
I wanted to advise these companies to deemphasize other concepts that people were using in relation to disruption (for instance, the “sharing economy,” “webrooming,” and “freemium”) and to see everything in terms of just one phenomenon: decoupling. I believed that focusing solely on decoupling would simplify the conversation, allowing busy executives to home in on the essence of the disruptive threat they faced and forge strategies to counter it.
Likewise, you can tie customers’ hands so that they can’t move their business to the startups, but it’s only a matter of time before customers figure out how to free themselves from the bonds. To fend off disruption, coexistence is key!
On average, I found, the number of patents granted was a consequence of revenues, not their cause.
Although my quantitative analysis didn’t include Ryanair, it’s worth noting that the airline became a disruptive powerhouse without possessing unique technologies or product innovations.
So how could Ryanair win in a highly competitive market with an inferior product? The company possessed something else that competitors lacked: an innovative business model.
FIGURE 2.1 HOW DECOUPLING DIFFERS FROM THE OTHER TWO WAVES OF DIGITAL DISRUPTION
Business Model Innovation, Not Technology
In effect, Klarna provides the shopper very short-term financing, capturing value not from customers but by charging a fee from merchants (Klarna justifies this fee by arguing that it reduces risk and friction in the online shopping process, increasing sales for merchants by preventing people from giving up at the last stage of the purchase process). Klarna thus decouples the act of buying from the act of paying, particularly when it comes to inputting credit card information.
Overall, if digital businesses are a subset of all businesses, we can regard tech firms as a subset in turn of digital businesses (see Figure 2.3).*7 FIGURE 2.3 SCHEMA OF TYPES OF COMPANIES
Technology, as Jim Collins put it more than a decade and a half ago in his bestselling book Good to Great, “is an accelerator, never a creator of momentum and growth.”47
Yet Four Seasons and other big chains didn’t necessarily identify the real reason customers wanted multi-room suites in residential areas of cities like Paris. It wasn’t just because customers wanted to feel comfortable when traveling with their families. It was because they didn’t want to feel like regular tourists during their tenth trip to the City of Light. This desire turned up in customer surveys and was confirmed by travel agents.
To get ahead of disruption, we need to pay far more attention to customers than we ordinarily do, and commensurately less attention to competitors. We need to discipline ourselves to look at markets from the customer’s perspective, not just the company’s, and to understand customers’ evolving desires and behaviors.
Focusing on competitors has worked well in the past, and it might still work in some situations, but it has become less applicable for companies competing in markets threatened with disruption.
When a traveler chooses between two hotel chains, she is selecting within the same basic business model. But when she considers Airbnb as an alternative to a hotel, she implicitly selects between different business models.
A business model from the customer’s point of view: “A business model consists of the value a business creates for me, what it charges me in exchange for that value, and what value it erodes for me.”
FIGURE 3.1 VALUE CLASSIFICATION IN A RADIO LISTENER’S CVC
Take a moment to notice an object in the room around you. Who acquired it—you, a family member, an acquaintance, a hotel or airplane employee? Take the time to empathize with this person, and you will appreciate all that he or she went through in order to buy the object: identifying a need, evaluating vendors, comparing options, deciding, purchasing, paying, receiving, installing (if necessary), and eventually disposing of it. Whether an offering is a physical product or a service, consumable or durable, all of these activities can be classified as either value creating, value capturing, or
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Value-creation decoupling includes businesses that break the links between two or more value-creating activities. The decoupler offers one of these value-creating activities, while the incumbent that has been decoupled retains another value-creating activity. Twitch took videogame spectatorship for itself, but it does not develop videogames to be played. It left that activity for incumbents like Electronic Arts. And that was Twitch’s billion-dollar idea. In value-eroding decoupling, disruptors break the links between value-eroding and value-creating activities. In videogames, Steam allows
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FIGURE 3.2 THE THREE TYPES OF DECOUPLING
When it comes to classifying types of decoupling, the critical factor is not the kind of activity that the disruptor decouples and takes for itself. Rather, it’s the activity that the decoupler leaves behind for the incumbent or someone else to continue providing.*6
In the videogame industry, Twitch leaves behind a value-creating activity—creating videogames. Steam leaves behind a value-eroding activity—the need to go to a retail store. And Supercell leaves behind a value-charging activity—charging customers a fee for using the product. That’s what makes these forms of decoupling different. In each case, the decoupler takes for itself one activity that creates value for customers.
Focusing on consumers helps us understand more deeply whether startups will succeed or fail at stealing customers from incumbents in existing markets. Simply because a disruptor can decouple the stages in a consumer’s value chain does not mean consumers will rush to substitute the disruptor for the decoupled incumbent. Think of customer activities as train cars. Integration forces operating in consumers’ minds cause the cars to become connected with one another. Specialization forces cause them to break apart. For decoupling to occur, the specialization forces must outweigh the integration
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Consumers incur costs in every stage of the CVC. Costs include not just the item’s price but also such non-monetary costs as the effort required to identify and select items (search costs), the effort to order and receive items (purchase costs),*8 and the effort to use and dispose of items (usage costs).
Remember, whatever business you are in, your customers always pay you with three “currencies”: their money, their time, and their effort.
