Unlocking the Customer Value Chain: How Decoupling Drives Consumer Disruption

by Thales S. Teixeira

In particular, I argue in Unlocking the Customer Value Chain that new technology isn’t driving most disruption today. Consumers are. And that in turn means incumbents require a different kind of innovation in order to thrive—not technological innovation, but a transformation in business models.

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.

These disruptive companies, and many lesser-known firms that we’ll analyze, all deploy innovative technologies, but they use technology to enable their business models. The business models themselves represent the true innovations.

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.

Instead of reacting to each new, potentially threatening startup, I advise that incumbents devise a system for responding to the overall pattern of disruption produced by changing customer needs. Incumbents should take a general approach to what is essentially a generalized problem.

When I use the term “disruption,” I am referring to an abrupt and sizable change of market shares among participants in an industry.

I define “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.

executives who are versed in consumer behavior are the ones who are best equipped to carry out customer-driven innovation.

Customers flock to upstarts to decouple because they see an opportunity to “consume” the value-creating portion of activities

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.

Our natural tendency is to think that the problems we face are unique to us. In our highly specialized professional worlds, we tend to think in terms of silos—particular fields, disciplines, functions, or specialties. Such extreme focus has its benefits, but it can also prevent us from spotting general patterns that can help us develop more appropriate responses.

A business model specifies how the firm creates value (and for whom), and how it captures value (and from whom).*1

A supermarket is no longer an establishment that just buys groceries, adds a markup, and sells the food to you. To the extent that it attracts and sells attention to brands, it resembles a media company more than a retailer.

Initially, most of Costco’s profits accrued from markups, but that has gradually shifted. Guess what percentage of Costco’s total 2016 profits of $2.35 billion owed to the fees it charged its members. Fifty percent? Eighty percent? One hundred percent? Try 112 percent.15 Costco lost money in its traditional supermarket retail business model and more than made up for it with membership fees. Costco stands as an incredible example of business model innovation in the groceries retail sector.

By the late 1990s, most online content that could be unbundled profitably had been. This first wave of business model innovation began to give way to a new wave: the disintermediation of goods and services.

In many cases, the innovative companies I studied as examples of decoupling seemed to be disrupting their industries thanks to the use of innovative technologies. After all, Uber, Amazon, and Birchbox are all regarded as technology companies, right? I decided to talk to these firms and learn about the new technologies they developed and were leveraging. It soon became clear to me that the initial success of these companies didn’t hinge on new and innovative technologies, but rather on the power of their business model innovations. Similarly, others have argued that even well-regarded “tech” companies such as Google, in their early days, didn’t invent completely new technologies, but rather invented or perfected new business models.41

Standard technology enables Trov to deliver services to customers. The new business model built around decoupling is what really allows Trov to stand out in a saturated market.

In general, I refer to digital businesses as for-profit organizations that use the internet (web, mobile apps, etc.) as a channel to acquire customers and/or deliver products and services. These firms are essentially “users” of technology innovations rather than “builders”—a key distinction. Companies such as Apple, Tesla, and some divisions of Amazon and Alphabet are technology innovators, but these represent the exception in the digital economy, not the rule. 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

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

As we’ve seen in this chapter, business models have grown more diverse and complex over time. This appears to be a general phenomenon: as markets develop and grow, the number of unique business models evident among competing companies increases, and the models themselves become increasingly refined, specific, and differentiated from one another. As an analogy, consider the humble lemonade stand that kids set up on their front lawn. The model is simple and age-old: obtain ingredients at subsidized prices (i.e., free from Mom and Dad), make lemonade, and sell it at a huge markup. Kids in neighborhoods across America have competed in this way. Today, in many industries, you no longer see the equivalent of simple lemonade stands winning out. Rather, you see lemonade entrepreneurs who give away lemonade for below-cost prices so they can get long lines of captive customers lingering around their yards, like Costco does. Then these entrepreneurs might entertain customers while they wait and, like Ryanair, sell them “add-ons” like snacks or bathroom privileges. That’s where the real profit now resides. Or lemonade entrepreneurs might engage a band to entertain their customers and require the band to pay them for the chance to promote themselves to their captive audience, like new media companies do. Or entrepreneurs might make money selling their captive customers insurance and warranty contracts that provide for “thirst quenching guaranteed,” like car dealers do. It all sounds ou...

As University of Michigan researcher Allan Afuah argues, most profitable business model innovations have little to do with the underlying product. Profiting from a technology or product innovation still requires an innovative business model.51

You should spend as much time or more evaluating and evolving your firm’s business model(s) as you do worrying about new technologies. After all, if you don’t focus on new waves of business model innovation, and decoupling in particular, others will. Your first task should be to understand the component(s) of your business model that is (are) not working.

In assessing your business model, it’s vital that you get to the core of the phenomenon: the customer’s changing needs and wants.

*2 According to scholars of business strategy, business models enable their managers to accomplish three tasks: classify businesses based on their similarities, experiment by changing inputs and observing outcomes, and replicate successful models.

Inside the Mind of the Shopper: The Science of Retailing, by Herb Sorensen

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.

Three of the other forces—industry rivalry, threat of new entrants, and threat of substitutes—arguably focus on different types of competitors.*2 Game theory models, meanwhile, conceptualize games as played with a competitor. Customers are secondary, conceived as the “prize” for which competitors are vying. One reason for this traditional emphasis on competitor over customers no doubt has to do with the accessibility and interpretability of data. It’s relatively easy to spot what the competition is doing in a given market, whereas it is considerably harder to discern customers’ motivations and actions.

Entrepreneurs at disruptive startups see the world in precisely this way, paying heed to Peter Drucker’s famous dictum “The purpose of a business is to create a customer.”7

As Amazon CEO Jeff Bezos has remarked, “When [executives of other companies] are in the shower in the morning, they’re thinking about how they’re going to get ahead of one of their top competitors. Here in the shower, we’re thinking about how we are going to invent something on behalf of a customer.”8

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.”

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 value eroding. The person who bought the object was implicitly or explicitly trying to get more of the first, reduce the second, and avoid the third altogether. That is all customers do. Ever!

Just as customers acquiring a product or service engage in only three distinct types of activities, so only three types of decoupling exist. Twitch exemplifies a subset of disruptive businesses that decouple value-creating activities. Other disruptive businesses either decouple value-charging activities or decouple value-eroding activities.*5

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 customers to stream videogames over the internet, just as Netflix does for movies and TV shows.13 With Steam, players no longer have to get off the couch and go to a physical retailer (a value-eroding activity) in order to play a game (a value-creating one). For gamers, that’s a pretty big deal, and Steam’s success proves it. As of 201...

The third type of disruption, value-charging decoupling, includes businesses that decouple value-creating and value-charging activities. Mobile game developer SuperCell allowed consumers to play most of its games for free, charging value by selling digital goods (in-app purchases) to the company’s most loyal players. In effect, SuperCell broke the link between buying a game (value charging) and playing it (value creating). SuperCell is famous for developing titles such as Clash of Clans, one of the world’...

if the quality of a gaming experience or beauty product purchased from an incumbent or disruptor is not materially different, these are cases of decoupling. If the difference in the quality of a product or service is large enough to account for the customer’s choice, then decoupling might not be the sole phenomenon at play.

Given the variety of customer benefits that result from integration or specialization forces in a given industry, we might wonder what determines the customer’s final decision. The answer is cost. 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.

One well-established way to measure the trust, reliability, and uncertainty of a company’s offerings is to consider the company’s brand equity. Incumbents might enjoy a higher brand perception than a newly formed startup does. On the other hand, smaller brands sometimes enjoy an advantage over larger ones. When urban millennials in the United States shop for packaged food in established grocery stores, they have started to favor relatively unknown, upstart brands rather than major, well-established ones.20

When in doubt, ask customers what they value most. Learn the costs they care about when making purchase decisions—not just some of the costs, but all of the important ones. Beyond the money, time, and effort they invest in making their purchase, luxury car buyers might tell you that reputation matters to them. Low-end car buyers, on the other hand, might claim that the vehicle’s reliability is critical. Clients of low-end financial services might say they care about access, whereas high-end banking clients are looking for exclusivity. In assessing additional classes of costs beyond money, time, and effort, scrutinize them closely. Make sure they really do impact the customer’s decision, and that you can measure these additional costs for both your offering and the disruptor’s offering. Finally, make sure that you aren’t double-counting. Additional costs must not overlap with any of the three discussed here.

Be patient as you perform this analysis. You might feel tempted to consider at once all of the activities you provide, but you can find yourself overwhelmed, lost in a thicket of hypothetical adjustments to your business model. Think: “If I want to change this, I’ll need to change that as well. And that. And that. And that.” Do what disruptors do and consider one activity at a time.

As you ponder options in your own company, be prepared for pushback. Paul, the executive who oversees physical stores, might complain that subscription boxes will cannibalize foot traffic. Ann in accounting might argue that price-matching will erode profitability. And Jim from logistics will cry foul about higher costs of automating replenishment. How should you respond to them? Each of their separate analyses is correct, but all of them implicitly assume that your customer base will remain the same whether or not you embrace any of the above changes. When your customer has the option of decoupling a piece of your business, this assumption no longer holds.

How should you respond to them? Each of their separate analyses is correct, but all of them implicitly assume that your customer base will remain the same whether or not you embrace any of the above changes. When your customer has the option of decoupling a piece of your business, this assumption no longer holds.

To avoid unpleasant surprises, you too should determine the costs incurred by your customer in each stage of the CVC, whether these are monetary, time, or effort costs. Then do the same for your competitors and new entrants, determining which company’s offerings fare best in the eyes of the customer. Ultimately, most customers will favor the option they perceive to cost less—not just in terms of price but in total. Is it yours? Or is it your upstart competitor’s?

This chapter and the two preceding it have sought to help you understand the new reality of disruption—what it is, how it works, and what causes it. There is a common pattern to the latest wave of digital disruption. It is driven not by technology but rather by customers’ desires to reduce the costs of acquiring goods and services. It’s not that technology is unimportant, but that it often serves as the enabler of disruption rather than as its primary originator.

Storefront decoupled the link between owning space and showcasing products.20

As long as a single company currently provides more than one activity to customers, an opportunity exists at least in theory for an entrant to come in and decouple those activities for customers.

we can engineer business model innovation by stacking three layers.*3

The first layer is the traditional way of doing things, the standard business model.

In the next layer, digitization, you might enjoy an advantage if you replicate your business online and deliver more benefits to customers than downsides.