Unlocking the Customer Value Chain: How Decoupling Drives Consumer Disruption

by Thales S. Teixeira

In the last layer, incremental innovation can tip the advantage in favor of the player who comes up with the most innovative addition to the two previous layers.

When the incremental innovation is based on decoupling, all successful decouplers manage to perform the five critical steps outlined earlier: they identify a target segment and its CVC, classify the CVC activities, identify weak links between CVC activities, break the weak links, and predict how incumbents will respond.

Then I posed the question to my students, most of whom had become DSC subscribers. Jonathan, one of my best students, had an answer. As a kid, he told me, he had watched his father shave frequently for his job. His father had bought Gillette razors because they were the best, and they were cheap. But his father also spent a big chunk of change on replacement blades. When Jonathan grew up and began to shave himself, he felt frustrated at how expensive it was to keep replacing Gillette blades. “Gillette has been holding us hostage,” he remembered thinking, “forcing us to buy their expensive blades. These things can’t possibly cost that much to manufacture.” Then an unknown startup named DSC came along, promising no more of the famous razor-and-blade pricing model that made you feel like a hostage. Its value proposition: “No hidden costs. Cancel anytime. You’re never locked in.”9 After years of seeing his father locked in, suffering in what seemed like an abusive relationship with Gillette, Jonathan could finally break away.

As of July 2017, Gillette held almost two thousand patents, all of which had been granted since 1975. In 2012 alone, after DSC had come onto the scene, Gillette obtained 125 new patents. Remember, we’re not talking about a jet engine or a complex new way of delivering a vaccine. We’re talking about a razor!

I asked my students whether they would go back to Gillette if the company reduced its replacement blade prices to match DSC’s. Their response: a near-unanimous no. That’s understandable. Just as people who leave abusive romantic relationships are loath to return, so, too, are customers in abusive commercial relationships. Going against the customer’s desires can work for some time, but not forever. Eventually a new company arises to offer customers what they really need. The simple truth is this: there is no larger risk to your business than going against customers’ needs and wants.

Incumbents that imitate startups might see dramatically reduced profits. Small startups might be able to make money on the significantly lower revenues or tighter margins that decoupling usually yields, but large organizations such as NBC, Telefonica, and Gillette lack the cost structure to support that.

Another alternative is to add value-creating activities. Ask yourself, “How can I increase the total value offered to my customer, incentivizing him or her to stick with me for the entire CVC?” In simple terms, recoupling involves either making it more worthwhile for customers to stick around or making it costlier for them to leave you,

you must follow one critical law of business model decomposition: rebalancing.

Rebalancing: Create value at every point where you attempt to capture value, and capture value at every point where you attempt to create value.

This process of carefully marrying activities that create value with those that charge for them is what I call rebalancing.21

I advise companies to look instead for new revenues systematically by mapping out the customer’s value chain and spotting activities that create value and for which incumbents are not yet charging.

Physical systems such as electrons, stars, and my daughter’s bedroom naturally become more disorganized over time. Its level of entropy, a measure of a system’s disorganization, rises. You can resist the law of entropy, but only by expending energy (in the case of my daughter’s bedroom, a lot of energy) to render a given system more orderly and to reverse the tendency toward disorganization.

I think of the CVC as one big oil pipeline, with each segment of the pipeline a CVC activity. In a coupled process, all the segments are tightly welded together, and oil (i.e., value) flows continuously from the beginning of the pipeline to the end. I then seek to understand how my clients can break up these segments of the pipeline and still ensure that value flows evenly and constantly from one end to the other. That can only happen, of course, if there are no leaks at any point in the pipeline. If leakage does occur, then the company has created an opportunity for a competitor to come in, put a bucket under the leak, and capture much of the value without having to build the expensive drilling and pipeline infrastructure that my client has built.

Before advising companies to decouple, I look for activities in the CVC where I can spot a difference between the value being created at some point in the CVC and the value that the company is charging up to that point. That’s what I call “leakage.”

Figure out what you’re leaving on the table, and claim that value before decouplers build a business around it.

pay only $79. The difference, $21, is what economists call “consumer surplus.” Conceptually, a person will buy a good or service only if the value to that person exceeds its price.

we can infer whether a decoupler might steal our customers before it builds out its business and enters the market by comparing surplus values.

decoupling is a wave of business model innovation. By their very nature, these waves are pervasive, drawing in many new players from inside and outside the industry. Most of these players are small, nimble, and unpredictable in their trajectories. But you can track their collective trajectory if you study their general motivation, dynamics, and range of options. Don’t focus just on the particular startup or tech disruptor that is coming after you. Broaden your perspective, observe the entire incoming wave, and respond to that.

Before deciding on a course of action, you might also consider whether you should respond at all. After all, gluing, breaking, or fixing your business isn’t easy. It requires considerable investment in money and managerial time. Would you be better off waiting? To answer that question, you’ll want to take into account the cost of action, as well as the risk of loss due to inaction. The cost of action will depend on the specifics of your firm’s market, approach, and resources. It’s a fairly standard calculation that established firms can easily perform. The risk of loss due to inaction, however, is trickier. In Chapter 6, I’ll provide a framework and set of tools to help you assess the two major risks you potentially accrue by not responding. First, what is the risk that, by doing nothing, you will be decoupled anytime soon? Second, if a new entrant tries to decouple your business, what’s at stake?

In the face of such complexity, customers tend to simplify the task of choosing, employing a two-stage approach. First, they use quick and simple filtering techniques to eliminate undesirable options. They then perform a slower, more elaborate comparison of the remaining options. For instance, consumers choosing which yogurt to buy might first eliminate all options that are not major known brands or that cost too much. This leaves them with what marketers have called a “consideration set,” a group of brands that customers actively consider before selecting one to purchase.23 The consideration set is one of the most important marketing concepts of the past few decades.24 It posits that brands in consumer products don’t compete by vying at once for each customer in one big match-up.

customers compose consideration sets on the basis of their awareness of and preferences for various options, as well as based on brand image, product differentiation, and category-specific factors. Consideration sets can vary greatly by the person, category, and even country.25

What does all this have to do with disruption? Everything. The consideration set is where the competition for customers begins (and ends) for some brands. If your customers decide that your company no longer resides in their small consideration set, then you won’t make the sale. As an incumbent, your company registers as an ongoing part of the consideration sets of many loyal customers. When a new competitor enters the market, big or small, disruptor or not, your goal is always twofold: to remain part of your customer’s consideration set, and to keep the new entrant out of that set. If loyal customers dropped you from their consideration set and added the new entrant, that would represent a worst-case scenario. There is no greater disruption than that.

Changes in your customers’ consideration sets are the first telltale signs of impending disruption to your market, and possibly to your business as well.

FIGURE 6.2 CUSTOMER CONSIDERATIONS AND POTENTIAL FOR DISRUPTION

By mapping out customers’ value chain and then aggregating their likely decisions, we can identify market-level (i.e., share) disruption.

The bottom line is that executives should incorporate customer sensitivity to different costs into any cost comparison analysis of incumbent companies and disruptors. To quantify the customer’s inclination to decouple an incumbent, we begin by calculating the cost differential of a decoupler’s offering vis-à-vis incumbents, and then accounting for the degree to which the target market population values money, time, and effort.

Putting all of these steps together help you to decide whether and how to respond to decoupling (see Figure 6.5): 1. Calculate the market share at risk due to decoupling (i.e., all similar decouplers). 2. If the risk is high, calculate the cost of responding and weigh it against the risk. This calculation will allow you to decide whether to respond to decoupling or not. 3. If you decide to respond, decide whether to recouple or decouple. 4. If decoupling, decide whether to change the business model by rebalancing or not.

incumbents must constantly monitor their customers’ consideration set via surveys and other market research tools.

Monitoring consideration sets will tell you which brands have a shot at stealing your customers and which don’t.

As a general rule, sizes of consideration sets in the United States for consumer package goods are about one-tenth the number of brands in the category overall.37 In less competitive markets, the chances that a brand is part of a customer’s set tend to be higher. Of course, merely being considered by consumers doesn’t guarantee sales. It’s critically important to monitor the brands and startups entering your market, as well as those in adjacent markets.

You need to define your competition as your customers see it, not on the basis of how physically similar your products might appear on the surface.

Are seminaries viewed to some as spiritual experiences? Does this put bible curriculum and retreats in the same consideration set?

But beware: mounting too large a response also carries negative consequences. Not every entrant deserves diligent consideration and a response. When business model innovation is on the rise, as is the case of decoupling, responding to all startups would constitute a huge economic burden. Yahoo offers a cautionary tale. By 2012, when former Google executive Marissa Mayer became its CEO, Yahoo was an incumbent in the search engine space, the third-most-popular search engine in the United States in terms of market share, after Google and Microsoft. Worried about a continuing decrease in its rankings, Yahoo went on a multiyear shopping spree. As of 2016, Mayer had acquired fifty-three digital and tech startups, spending between $2.3 and $2.8 billion, not to mention countless hours of her top executives’ time for M&A due diligence. Yahoo eventually shut down thirty-three of these startups, discontinued the products of eleven startups, and left five to their own devices, failing to assimilate them. In all, Yahoo fully integrated only two of these startups.41 In 2017, unable to grow, Yahoo was acquired by Verizon for $4.8 billion, a far cry from Yahoo’s peak valuation of $100 billion.42 Overresponding can kill companies, just as failing to respond can.

In the book’s first section, we looked at what’s really disrupting businesses: the decoupling of activities done by customers. The second section delved into whether, when, and how established companies should respond. Incumbents can respond in two distinct ways when confronting a decoupler: either they can glue various customer activities back together (recoupling), or they can find ways of accepting the rupturing of these activities and coexisting peacefully with it (rebalancing). To decide what to do before or after a disruptor has entered your market, you must assess the multiple risks involved in taking action or in failing to do so. In-depth analysis of customers’ choices, preferences, and associated costs will reveal how incumbents should approach the threat of decoupling in their industries.

“intrapreneur”)

a focused approach for starting a disruptive business. Rule #1: Acquire customer activities. Rule #2: Revert to the first rule.

As the first business in a fast-growing market, mass offerings eventually attract competitors. Those considering entering the original incumbent market could do so by building another mass offering to compete with them. But that would be foolish, as customers would not clearly distinguish the new offering from the established one. So instead, new entrants usually specialize. That is, they choose one or a couple of dimensions that they know customers might value more, and they create so-called niche offerings that are appreciably stronger in those dimensions. That allows new entrants to quickly win new customers—for instance, those that value low prices, high quality, or convenience more than they value assortment or customization.

FIGURE 7.1 EVOLUTION OF MARKET LANDSCAPE OCCUPANCY IN CLOTHING

If you’re starting a disruptive business, especially one that seeks to decouple activities, you need to understand the history of specialization in the market.

Early on, you cannot expect technology alone to accomplish this difficult task. Uber went door-to-door to get its first drivers to sign up. Airbnb did the same for its renters, and when it convinced people to list their homes, its employees went out of their way to find a person to rent each home.7

Any disruptive business seeking to attract customers must appeal to them one at a time. Only afterward can technology accelerate the process.

7. See your business through your customer’s eyes.

disruption occurs most intensively when some of your customers question the value of your entire industry.

The principles can help you start a disruptive business, but they don’t always apply when you’re seeking to grow into a mass market—your first million customers, or your first ten million.

It’s never easy to abandon what has worked in the past, but it’s absolutely necessary. In order to keep growing, Rebag will have to grow up.

decoupling theory prompts us to see customer activity acquisition as the central task for any new disruptive business—both startups and new corporate ventures. Rather than overwhelming themselves with a variety of goals and efforts, entrepreneurs and intrapreneurs do better to focus on choosing which customers to service, and then on working their hearts out to acquire them.

After acquiring their first thousand or so customers, startups must begin a very different process—that of scaling growth.

From the beginning, the notion of “core competency” has always been somewhat vague. Is it a skill? A process? A capability? How do these differ from one another? Zook’s answer, in his 2001 book Profit from the Core (coauthored with James Allen), was to conceive of core competencies as “strategic assets” and to propose various kinds of adjacent spaces that companies could consider where they might deploy these assets.3

The strategy of defining core competencies and growing into adjacent areas is conceptually sound, embodying the notion of synergies derived from scale and scope economies. Most businesses start by leveraging scale economies, making the same product or rendering the same service over and over again and achieving increased market penetration. The efficiencies of production at scale give these businesses an advantage, lowering their unit cost compared to competitors’. When demand dries up, they can shift gears to a diversification strategy, producing products and services in new markets that allow for economies of scope. By producing two or more distinct products requiring similar skills or resources (buses and trucks, for instance), they also lower their unit cost. In both cases, the reduction of the firm’s own costs leads to growth in revenues, as the firm either charges customers lower prices or extracts higher profits that it then reinvests.

Ask your customers. As a brand manager, you may be surprised to learn that they regard your brand as significantly less versatile than you do. What you call closely adjacent, they may regard as far and remote.