Unlocking the Customer Value Chain

1. Decoupling: The New Wave of Digital Disruption

Decoupling represents a new wave of digital disruption, one characterized by the breaking or "decoupling" of links between adjacent customer activities.

Breaking traditional links. Decoupling occurs when startups break apart the chain of consumption activities that customers traditionally performed with a single company. For example:

• Amazon decoupled the act of browsing products from purchasing them
• Netflix decoupled watching content from cable TV subscriptions
• Airbnb decoupled using accommodations from owning them

Value creation and capture. Decouplers succeed by:

• Focusing on one or a few specific activities in the customer value chain
• Reducing costs (money, time, effort) for customers in those activities
• Creating new business models to capture value from these decoupled activities

This wave of disruption is pervasive across industries, from retail to transportation, entertainment to financial services, fundamentally changing how customers interact with businesses.

2. Customer-Driven Disruption, Not Technology-Driven

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.

Shift in perspective. The book challenges the common belief that new technologies drive disruption. Instead, it argues that:

• Customers are the primary drivers of disruption
• Changes in customer needs, behaviors, and preferences create opportunities for new business models
• Technology often enables these new models but is not the root cause

Customer-centric approach. To understand and respond to disruption, companies must:

• Focus on evolving customer needs rather than just competitor actions
• Analyze the customer's value chain and identify pain points
• Develop business models that address these pain points more effectively than incumbents

This perspective shift empowers both startups and incumbents to spot disruptive opportunities by deeply understanding customer behaviors and unmet needs.

3. Business Model Innovation as the Key to Disruption

Business model innovation is a powerful force of abrupt market-level change, in some cases more powerful than technology.

Beyond product innovation. While technological innovation is important, business model innovation often drives more significant disruption:

• It changes how value is created and captured in an industry
• It can be more difficult for incumbents to replicate than new technologies
• It often leverages existing technologies in novel ways

Examples of disruptive business models:

• Subscription models (Netflix, Spotify)
• Peer-to-peer platforms (Airbnb, Uber)
• Freemium models (Dropbox, LinkedIn)
• On-demand services (Instacart, TaskRabbit)

Impact on incumbents. Established companies often struggle with business model innovation because:

• It may cannibalize existing revenue streams
• It requires organizational changes and new capabilities
• It challenges deeply held assumptions about how the industry works

To stay competitive, both startups and incumbents must prioritize business model innovation alongside technological advancements.

4. The Customer Value Chain: Understanding and Exploiting It

A CVC is composed of the discrete steps a typical customer follows in order to select, buy, and consume a product or service.

Mapping the journey. The Customer Value Chain (CVC) is a crucial concept for understanding decoupling:

• It outlines all activities customers perform to fulfill their needs
• These activities can be categorized as value-creating, value-charging, or value-eroding
• Understanding the CVC reveals opportunities for disruption

Key components of the CVC:

1. Awareness and discovery
2. Research and evaluation
3. Purchase decision
4. Delivery or access
5. Use and consumption
6. Support and maintenance
7. Renewal, upgrade, or disposal

Identifying opportunities. By analyzing the CVC, companies can:

• Spot inefficiencies or pain points in current industry practices
• Identify activities that could be performed more efficiently if decoupled
• Develop new business models that focus on specific CVC activities

Understanding and exploiting the CVC is essential for both disruptors seeking opportunities and incumbents defending against disruption.

5. Engineering Decoupling: A Systematic Approach

To disrupt markets through decoupling, successful decouplers must do the following:

Five-step process. The book outlines a systematic approach to engineering decoupling:

1. Identify a target segment and its CVC
2. Classify the CVC activities (value-creating, charging, or eroding)
3. Identify weak links between CVC activities
4. Break the weak links
5. Predict how incumbents will respond

Key considerations:

• Focus on activities where customers experience high costs (money, time, effort)
• Look for opportunities to reduce these costs significantly
• Develop a business model that can sustainably capture value from the decoupled activity

Examples:

• Storefront decoupled retail space ownership from product showcasing
• Trunk Club decoupled outfit curation from clothing purchase

This systematic approach helps entrepreneurs identify and exploit decoupling opportunities more effectively.

6. Responding to Decoupling: Recoupling vs. Rebalancing

To respond, as we've seen, by recoupling, or by decoupling and rebalancing (see Figure 5.4).

Two primary responses. Incumbents facing decoupling threats have two main options:

1. Recoupling:

   • Attempt to reintegrate decoupled activities
   • Examples: contractual obligations, technological barriers, legal measures

2. Rebalancing (preemptive decoupling):

   • Embrace decoupling by offering your own decoupled services
   • Adjust your business model to create and capture value differently

Considerations for choosing:

• Customer desires and behaviors
• Regulatory environment
• Technological feasibility
• Long-term sustainability

Rebalancing example: Best Buy's response to showrooming:

• Price-matched online competitors
• Charged manufacturers for in-store displays (creating a new revenue stream)
• Embraced its role as a showroom while finding new ways to capture value

The choice between recoupling and rebalancing depends on the specific situation, but rebalancing often proves more sustainable in the long run.

7. Assessing Risk and Deciding When to Respond

Before deciding on a course of action, you might also consider whether you should respond at all.

Risk assessment framework. The book provides a structured approach to evaluate the threat of decoupling:

1. Assess the risk of entry:

   • Is there co-consumption of activities?
   • Can these activities be separated?
   • Is there leakage (uncaptured value)?

2. Analyze changes in customer consideration sets:

   • Are disruptors entering customers' consideration sets?
   • Are they fundamentally changing how customers make decisions?

3. Calculate Market at Risk (MaR™):

   • Quantify potential market share loss to decouplers
   • Consider monetary, time, and effort cost differences

Decision-making process:

1. Calculate market share at risk
2. Compare risk to the cost of responding
3. Choose between recoupling and decoupling (if responding)
4. Decide whether to rebalance the business model

This framework helps executives make data-driven decisions about when and how to respond to decoupling threats.

8. Acquiring Your First Customers: Principles for Startups

Rule #1: Acquire customer activities. Rule #2: Revert to the first rule.

Customer acquisition focus. For startups, acquiring the first 1,000 customers is crucial. Key principles include:

1. "Buy" customers in bulk (target groups, not individuals)
2. Don't confront competitors directly (find underserved niches)
3. Adopt non-scalable tactics initially
4. Incubate early customers (especially on the supply side for marketplaces)
5. Use low-tech, offline tools
6. Favor operations over technology at first
7. See your business through your customer's eyes

Examples:

• Airbnb photographed listings to improve quality
• Uber targeted event attendees for bulk customer acquisition
• Etsy visited craft fairs to sign up artisans

Customer roles. Early customers provide more than just revenue:

• Product feedback and improvement ideas
• Word-of-mouth marketing
• Tolerance for imperfections

Focusing intensely on acquiring and serving early customers lays the foundation for future growth.

9. Growing from 1,000 to 1 Million Customers: Adjacent Coupling

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

Growth through adjacencies. After initial success, startups can grow by:

• Identifying adjacent activities in the customer value chain
• Expanding to offer these activities, creating customer-side synergies
• Strengthening integration between newly coupled activities

Benefits of adjacent coupling:

• Leverages existing customer relationships
• Reduces customer acquisition costs for new offerings
• Creates barriers to entry for potential competitors

Example: Alibaba's growth strategy:

• Started with B2B e-commerce (Alibaba.com)
• Expanded to C2C (Taobao) and B2C (Tmall) e-commerce
• Added adjacent services: payments (Alipay), cloud computing, logistics

Organizational implications:

• Structure the company around major CVC activities
• Ensure each business unit combines value-creating and value-charging activities
• Foster integration across units to create seamless customer experiences

Adjacent coupling provides a focused, customer-centric approach to growth that builds on initial decoupling success.

10. Reclaiming Lost Customers: Regaining Customer-Centricity

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.

Avoiding the resource-centric trap. As companies mature, they often shift focus from customers to protecting valuable resources:

• Physical assets (e.g., stores, equipment)
• Intellectual property
• Established revenue streams

This shift can lead to:

• Missed opportunities for innovation
• Vulnerability to disruptive entrants
• Loss of customer-centricity

Regaining customer focus:

1. Reassess incentive structures to reward customer-centric decisions
2. Bring in new talent with fresh perspectives on customer needs
3. Empower employees to challenge resource-centric thinking
4. Regularly expose executives to direct customer interactions

Examples:

• Intuit's "follow-me-home" customer observation program
• Axel Springer's acquisition of digital startups to infuse customer-centric thinking

Reclaiming lost customers requires a deliberate effort to refocus the entire organization on evolving customer needs and behaviors.

11. Spotting the Next Wave: Present-Casting the Big Seven

Broadening Your Span of View + Determining Where Costs Are Exceedingly High + Translating Trends Across Domains

Present-casting framework. To spot future waves of disruption, focus on current customer behavior changes in seven key consumption domains:

The Big Seven:

1. Living (housing, home goods)
2. Moving (transportation)
3. Eating (food, drinks)
4. Dressing (fashion, personal care)
5. Learning (education)
6. Entertaining (media, electronics)
7. Healing (healthcare)

Analysis process:

1. Track cost increases (money, time, effort) across the Big Seven
2. Identify domains with significant cost growth or inefficiencies
3. Look for emerging customer behaviors that address these pain points
4. Translate trends across domains to spot broader patterns

Key insights:

• Focus on the present, not speculative future predictions
• Analyze both monetary and non-monetary costs to customers
• Consider how trends in one domain might apply to others

Example: The rise of subscription and "set-it-and-forget-it" models across multiple Big Seven domains.

By systematically analyzing the Big Seven, companies can identify nascent disruptive trends before they become obvious, allowing for proactive responses to emerging threats and opportunities

Last updated: July 25, 2024