Unlocking the Customer Value Chain: How Decoupling Drives Consumer Disruption

by Thales S. Teixeira

Customer-side synergies: Cost reductions that the customer gains while consuming multiple activities provided by a single firm.*1

CVC adjacencies: Activities immediately preceding and following those that a customer chose to decouple from an incumbent.

Whereas many businesses might exist adjacent to your core business, only a few business opportunities lie adjacent to the existing CVC activities you offer your customers.

Although companies can also sometimes consider non-adjacent activities proximate to the decoupled activity, immediately adjacent activities remain the natural candidates to consider first when trying to grow your business.*2

Coupling: The act of sequentially adding and strengthening the links between adjacent customer activities captured from an incumbent.

In theory, the process of coupling can continue until the disruptor subsumes all activities from the traditional incumbent and becomes the new incumbent.

FIGURE 8.1 GROWTH PHASES IN ADJACENT COUPLING

The beauty of leveraging customer-side synergies is that it reduces pressure on companies to try to find new customers for their new offerings. All they have to do is offer them to current customers—a significantly cheaper task to accomplish.

As I discussed in Chapter 3, some CVC activities create value, while others charge for or erode value. It makes little sense to assemble a conglomerate of businesses and position one business unit as the sole value-charging entity, or even worse, to position another as the sole value-eroding unit. Each business unit must continue to function as a business. As such, each should maintain responsibility for at least one value-creating and one value-charging activity, with the head of the unit overseeing it.

In evaluating where to grow next, think methodically about each activity in the customer’s value chain. Map out the CVC activities as seen by the customer. Then switch the focus back to you, determining the skills you would require in order to bring to market an offering that helps customers perform each activity. Compare these skills with those your company currently possesses. If the skills match up well, then you might viably couple that activity. Otherwise, you’ll need to fill in skill gaps by building skills internally, borrowing from others via a partnership of some sort, or buying them by acquiring people or businesses.

One corollary of decoupling theory is that companies will tend to stall not when they stop innovating per se but when they abandon the laser focus on the customer needs that fueled their early growth to begin with. In modern business parlance, stallers lose their customer-centricity. I’m not implying that companies should deliver on all customer requests and requirements. Customer-centricity means putting a central focus on the customer when making important decisions, rather than focusing on competitors, business partners, employees, leaders, and the company itself. It’s a matter of prioritization and purpose, not blind obedience. As they decouple, startups are guided by a deep, intuitive understanding of the importance of customer needs. Large, established companies lose sight of customers, focusing instead on safeguarding the resources they have built or acquired in the act of serving customers. They become attached to those resources, forgetting that customers change, and companies must change with them.

Whatever their resource, incumbents generally follow up by asking: “How can we leverage our most valuable assets to take advantage of the new opportunity?” If the opportunity doesn’t mobilize the prized assets, then the incumbent perceives that it holds no advantage relative to others. Why play a game in which you and your penniless opponent stand equal chances of success?

For disruptors, revenue growth originates in one place, and one place only: customer acquisition. If such acquisition requires an asset, then the disruptor might want to build, acquire, or borrow that asset from others. But disruptors don’t regard the asset as the end game. Regardless of the means to get those resources, startups milk resources to get customers, instead of milking the customers. Their mindset isn’t resource-centric but truly customer-centric. Just look at the metrics that startups commonly use: customer lifetime value, average revenue per user, and revenue per active customer.

Resource-centricity: Certain firm-owned resources are your most valuable possessions. All your major business decisions should help you expand and leverage these resources. Customer-centricity: Your customers are your most valuable possessions. All major business decisions should enhance your ability to increase the number of customers and leverage them.

Incumbents and disrupters often possess fundamentally different views of the same situation.

If incumbents’ embrace of a resource-centric perspective constitutes the underlying culprit behind growth stalls, companies can’t avoid or mitigate these stalls simply by innovating more, as experts have advised. It’s easy enough to convene all of your engineers, scientists, and designers and charge them with creating some great new offering, or to assemble the strategy department and tell them to devise a brilliant new strategy. But if you’re Comcast or Blockbuster, that approach alone won’t allow you to make the decisions necessary to take on Netflix. Rather, executives at incumbents must set aside their attachment to resources and redirect their company’s primary focus back to customers. At even the most innovative incumbents, resource-centricity tends to dominate, leaving the company vulnerable to growth stalls.

If an idea bears no apparent complementarity to Windows or Office but is too good to pass up (say, a new virtual reality headset or a next-generation social network), senior Windows or Office bosses usurp the idea from lower-level or less powerful managers. Although they might intend to develop and market the idea, they often wind up sitting on the innovation and, in the process, precluding others from working on it. This tendency was so pervasive that employees outside the Windows and Office twin towers have a name for it: “licking the cookie.” Think back to grade school, when you ate meals with other kids. To establish their dominance, the bully types would steal cookies from other kids and eat them. When the bullies became too stuffed to eat any more, they would grab cookies from the table, lick them, and put them back—just so the smaller kids couldn’t eat them, either.

Robbie Bach, former president of Microsoft’s Entertainment and Devices Division, oversaw the company’s gaming, music, video, phone, and retail sales businesses for two decades. In an interview with me, he recalled an instance when he had his cookie licked. “My group wanted to design a better media player,” he said, “but the Windows team wanted its own media player. And so they got to design it. Do I think people were devious about it? No. People would let their ego get in the way of it. In that case, both groups lost. None was successful. This was all very detrimental to our customer. What happened? Apple won.”6 At some point, Microsoft’s executives stopped making product launch decisions that were in customers’ best interest, and instead made decisions that benefited themselves. The company possessed a powerful innovation engine, but other forces within the company still derailed innovative products, killing many promising and even game-changing opportunities.7 Decision-makers didn’t want to invest time, money, and reputation on highly uncertain and unproven ideas when deploying resources toward the big moneymakers afforded a more certain payback.

Lack of innovation is a customer-centricity problem, not an R&D problem. Therefore, asking your product developers inside the company to “just innovate” will rarely head off a growth stall. To innovate, you first need to eliminate impediments to customer-centricity among both leaders and managers. This challenge brings you face-to-face with human nature. The reality is that companies are not customer-centric; people are. So let’s spend a moment examining what individuals within companies need in order to put customers first.

As scholars in the discipline of motivational psychology have found, people will freely perform a desired task only if two conditions are satisfied. First, they must possess the basic skills and resources to perform the task. Lacking the ability to perform the task, they might attempt it, but they certainly won’t succeed. Second, even if people can perform the task, they must want to do it. It follows that to motivate employees to focus on customers’ needs, companies must equip them to do so, and provide the proper incentives. To equip employees to favor the customer’s evolving needs and wants, companies must put a great deal at employees’ disposal, including opportunities to observe or connect with customers, intellectual approaches for understanding customers and responding to their demands, internal processes that employees can deploy inside a company to work on behalf of customers, and finally, actual experience in dealing with customers.

only two approaches exist for realigning employees’ priorities to customers’ needs. First, they can change how employees earn financial recognition (salaries, bonuses) and promotions, providing other kinds of incentives as well. That’s a tall order in many large organizations, as quite often no single executive fully controls compensation and promotion decisions. It requires a collective effort at the leadership level. Second, leaders can change the people, bringing in executives and managers who already are properly incentivized to put customers first. In sum, either change the incentives for the same people, or change the people.

Intuit made it easier for employees to pursue customer-focused innovation by enabling employees to stay in close contact with customers. The company regularly arranged for a small group of employees to experience “follow-me-homes”—visits to customers’ homes or workplaces, during which employees could observe customers opening up the software product, installing it, and using it. In 2011, a follow-me-home prompted software developer Hugh Molotsi to lead a small, internal, startup-like team to create Merchant Services, a credit card payment processor tool for small businesses to use with QuickBooks.14 By 2017, employees were conducting about ten thousand hours of follow-me-homes each year. As Brad Henske, the company’s former CFO, remarked, “I read the other day that Microsoft hired anthropologists to study how people work. We have those people here—we call them employees.”15

The right intervention, as I’ve argued, isn’t to attempt to innovate your way out of a growth stall, but rather to first reorient the organization around customers. Fast-growing new entrants are, by design, focused on the customer rather than on the hard assets or other resources they possess. That’s why they experience such rapid growth.

Just as California offers a tax rebate for people buying electric cars, so, too, management might provide funds for employees to build or acquire new resources for the purpose of serving customers’ changing needs. Obviously, leaders should expect that these new resources will deliver real, enhanced value for customers in one of three forms: more value-creating activities, reduced value-charging activities, or the elimination of value-eroding activities.

Take a deep and comprehensive look at the incentive structure throughout your company. Somehow, somewhere, some way, people lost interest in customers. They’re spending all their time thinking about competitors, collaborators, or their own career prospects. Make it worth their while to start thinking about customers again.

one option to fix this might be to tie a portion of your old-guard managers’ bonus structure to new areas and initiatives that they helped develop using their own budgets. Such a move would prompt employees who aren’t directly tasked with leading new innovations to place bets on new initiatives in the company. With their own resources in the game, managers would feel more committed to the new initiatives, and more inclined to support them. One thing is certain: the usual tactics companies deploy to spark innovation—including motivational pep talks by the CEO, articulation of a beautiful vision, and allocation of resources to innovation—will all fail if the right incentives don’t exist to propel collaboration among executives and managers on the customer’s behalf.

planning for the future has become extremely difficult, and even somewhat futile—as it now is in many industries. For that reason, long-term planning approaches that require a firm’s executives to first look into the future, decide what position they want their company to occupy, and then work backward in time to determine the strategic assets needed in order to achieve said position rarely work. Either the future is too uncertain for management to agree upon, or not enough details of that future are visible to allow for precise strategic planning.

Customer needs change, and with that comes new customer behavior, paving the way for companies new and old to offer products better tailored to these evolving needs.

Collectively, these researchers have shown that capturing present trends is more accurate when data are bountiful, and it serves businesses better than inaccurately trying to predict future changes not already present. As the sixth-century-BC Chinese poet Lao Tzu once wrote, “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.”6

According to one classification, the Global Industry Classification Standard (developed by MSCI and Standard & Poor’s Financial Services), there are eleven macro sectors, twenty-four industry groups, sixty-eight industries, and 157 sub-industries.10

The typical household purchases thousands of goods and services throughout the year in hundreds of categories, but the overwhelming majority of that spending—94 percent in 2016 in the United States11—occurred in just seven categories, what I call the Big Seven. The Big Seven categories correspond to a series of consumption choices that people must make in the course of their daily lives: where to live (housing, home goods, and maintenance), how to move (air and land transportation), what to eat (food, drinks, and their preparation), what to wear (fashion, cosmetics, and personal grooming), how to learn (formal and informal education), how to entertain (media, electronics, and sports), and how to heal ourselves (healthcare, physical and mental treatments). If you want to understand potential shifts in your industry, you should look to these categories for early signs. That’s because the Big Seven allow you to identify the major changes in needs, wants, preferences, and behaviors incubating in households that may extend into other categories and industries, including your own.

A Pew Research Center study found that about 20 percent of Americans routinely incorporated four or more of these services into their daily lives. This same group of consumers then moved on to adopt similar convenience-seeking services across other industries.12

The same goes for the need for variety (what marketers call variety-seeking behavior), need for uniqueness, need for value-for-money, and need for sustainability. Once consumers gain a taste for any of these particular needs in one category of Big Seven goods, many quickly seek it in the other categories where purchases are frequently made.

I have yet to find a good example of SIAFI services or subscriptions in one of the Big Seven: how we learn. Informal short-term education is flooded with subscription services, but not long-term formal education such as undergraduate and postgraduate or professional degree programs. Most colleges have four-year programs, while postgraduate degrees other than the JD or MD tend to require two years to complete. These offerings assume that young people receive an education, absorb as much knowledge as possible, and then deploy their knowledge in the workforce. While teaching undergraduates, graduate students in business, and senior executives, I have noticed two trends. First, undergrads and some graduate students are growing impatient with the sequential, multiyear education they require in order to earn a degree. If they could, they would rather take a few courses and then enter the job market. There they could practice what they have learned, and also understand better what kind of knowledge they require going forward.

I’ve also noticed that many senior executives want to return to school more frequently. The old model of “first learn, then practice” is becoming outdated. People are taking to heart the common expression that “education is a lifelong goal,” one that we cannot compartmentalize temporally.

In looking to the Big Seven in order to spot new waves of disruption, companies should bear in mind one particular tenet of decoupling theory: attending to the demand side (i.e., studying customer behaviors and underlying motivations) rather than the supply side (i.e., studying companies and their offerings). The rising desire for SIAFI represents a growing wave of consumer behavior, and as I have suggested, businesses have responded to it with distinct and specialized products and services, including subscriptions, product-as-a-service (PaaS), and playlists (in the case of content). It’s not the rise of subscriptions, say, that is disruptive—this is merely one type of response. The underlying driver is customers’ emerging need to secure providers and provisions up front, thereby incurring a setup cost, so as to receive a constant flow of value in the foreseeable future.

It’s also quite risky to jump on a supply-side bandwagon. If you see that businesses in various industries are rolling out subscription services, you might feel tempted to create a subscription service yourself. But did you really spot a new wave? No. As many companies have failed with subscription services as have succeeded. Subscriptions for snacks? A startup called Munchpak tried it—and failed. Subscriptions for craft-making products? A startup called Adults & Crafts tried it—and failed. Subscriptions for artisanal beer? Craft Beer Club tried it—and failed. The truth is that most people lack a strong motivation to SIAFI when it comes to snacks, crafts, and alcohol. They like variety and the process of looking for novelty, and they don’t seek to standardize up front in order to mitigate a large, perceived cost carried into the future. More generally, offerings in different categories don’t allow us to understand the root cause or primary drivers of demand. And it’s precisely these drivers that you must tap into if you wish to identify and ride a consumer-driven disruptive wave.

let’s now explore how to go about detecting where the greatest opportunities for disruption lie. The method I propose is simple: by identifying sizable increases in costs to consumers across the Big Seven, we can detect where consumers might soon switch to a new disruptive product or service provider.

In the United States, the Bureau of Labor Statistics (BLS) has compiled data on the costs of many consumer products and services for the past few decades.19 Based on that research, I was able to estimate the rise (or fall) in costs for the Big Seven over the past twenty years. Let’s review these cost trends in each of the seven categories.

Consumer learning (including college tuition, primary education, and childcare) has seen the fastest cost increases of any of the Big Seven: a 144 percent rise over two decades, in real terms, after controlling for inflation (see Figure 10.1).20

The next consumer market most prone to disruption, as measured by rapid cost increases, is consumer healing, which includes healthcare and well-being products and services. The real cost of healing Americans has increased by 100 percent in real terms, on average, and is expected to rise even faster in developed countries grappling with aging populations.22 Thousands of new startups have cropped up in this space. Collectively, they will reshape how much we pay for healthcare in the years to come, and they will also lead to a new emphasis on preventing diseases, not merely treating them.

The third biggest opportunity for disruption lies in consumer living (including housing, maintenance, and the cost of heating and cooling our homes), where prices have increased by 63 percent in real terms.

The fourth biggest opportunity for disruption lies in consumer eating. Average real prices for food have risen by 56 percent since 1997.24

The fifth largest opportunity for disruption lies in consumer moving, including private vehicles, car manufacturing, air travel, and public transportation. Vastly different on the surface, these industries have seen real cost increases of about 24 percent for typical U.S. consumers.25

Two of the Big Seven have actually seen real cost decreases over the past twenty years. Costs to the consumer in consumer dressing (e.g., apparel and shoes) have declined around 4 percent, aided in part by the rise of vertically integrated makers and Asian manufacturers.27

Last, costs in consumer entertaining (including televisions, toys, videogames, and sports) have fallen about 77 percent, mostly because of the lower cost of consumer electronics and computers.28

I’ve described cost-related trends in the Big Seven in the U.S. market only. What about global markets? It is remarkable how important spending in the Big Seven is across markets. It represents 91 percent of spending in Mexico, 87 percent in Germany, and 86 percent in Japan. Wherever you look, the Big Seven’s share of household budgets accounts for around 86 to 94 percent of every peso, euro, yen, or dollar spent (see last row of Table 10.1).

TABLE 10.1 CONSUMER HOUSEHOLD EXPENDITURE BY DOMAIN AND COUNTRY IN 2016 Source: Adapted from Australian Bureau of Statistics, Eurostat, OECD, U.S. Bureau of Labor Statistics.

In most developed countries for which I compiled Big Seven data, people devote most of their spending to two categories, living and eating.

Mexicans spend considerably more on eating—nearly 29 percent of their income. International data on food expenditures show that families in poorer countries usually spend higher fractions of their income on food, although in absolute numbers average Mexicans spend half of what Americans do, and a third of what Hong Kong residents pay.32 Finally, Americans spend considerably more on healing themselves, about 20 percent of their income—ten times greater as a percentage than what Britons spend, and four times greater than what Germans spend.33