customer-value-chain

What Is The Customer Value Chain And Why It Matters

In the book Unlocking The Customer Value Chain, professor Thales Teixeira explains it as a framework of all the steps or activities that customers have to go through to acquire products and services. The customer value chain then helps to map the journey of our customers from their viewpoint.

Why the customer value chain matters

There used to be a time when the value chain was primarily intended as “the process or activities by which a company adds value to an article, including production, marketing, and the provision of after-sales service.” (source: Google)

While this is still a valid definition, if we change perspective and we look at it from the customer viewpoint, the value chain is “a conceptual idea that explains in a framework all of these steps or activities that customers have to go through in order to acquire products and services.” (Thales Teixeira in the FourWeekMBA interview)

This is one of the most valuable concepts to internalize if you’re launching or running a business in a market controlled by large tech players.

If they disrupted old players, there is always a step of the value chain that you can unlock. 

Customer-centrism as a market force

customer-obsession
Customer obsession goes beyond quantitative and qualitative data about customers, and it moves around customers’ feedback to gather valuable insights. Those insights start by the entrepreneur’s wandering process, driven by hunch, gut, intuition, curiosity, and a builder mindset. The product discovery moves around a building, reworking, experimenting, and iterating loop.

The penetration and maturity of the web favored those companies who could tap into customers’ wants and needs, to also to understand better than anyone else the products they wanted.

This focus on customers enabled companies to build competitive advantages by building valuable business models.

Where in the previous era, companies could gain a competitive advantage by optimizing business processes. In the new era, those companies that built value for customers could gain a lasting advantage.

From vertical integration to unbundling

unbundling
Unbundling is a business process where a series of products or blocks inside a value chain are broken down to provide better value by removing the parts of the value chain that are less valuable to consumers and keep those that in a period in time consumers value the most.

A classic way for companies to build a lasting advantage in the previous era was the optimization of the supply chain and the integration of each step of it to produce products at a lower cost.

Until new players, primarily born in the web era (like Amazon) learned to break the value chain of dominating companies to build a whole new business model.

Key takeaways

Some key elements to take into account are:

  • A business model is about delivering value and capturing a portion of that value in the form of revenues and profits and figuring out who this value‘s captured from is very important.
  • The customer value chain is a conceptual idea that explains in a framework all of these steps or activities that customers have to go through in order to acquire products and services.
  • The web-shaped the business world with three waves: unbundling (breaking the product), disintermediation (breaking the supply chain), and decoupling (breaking the customers’ value chain).

Customer Value Chain Waves: From Bundling To Unbundling, back to Deintermediation and Re-intermediation

The customer value chain is the best place to start when it comes to identifying entry points incumbents’ weak spots.

entry-strategies-startups
When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution, or value. A product approach takes existing alternatives and it offers only the most valuable part of that product. A distribution approach cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.


Disintermediation

Usually, a great place to start when it comes to redefining the customer value chain is disintermediation. Where you remove the middleman and enable direct access between consumers and manufacturers.

disintermediation
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all, can produce products that customers want.

Reintermediation

Another way of redefining the customer value chain is by re-intermediating an industry, by replacing the middleman with another middleman, which perhaps is more effective in serving the customer.

reintermediation
Reintermediation consists of the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.

Decoupling

In a decoupling mode, instead, a startup can simply offer part of the product or service, which the user/consumer value the most. While avoiding carrying the cost associated with offering a “full product.”

decoupling
According to the book, Unlocking The Value Chain, Harvard professor Thales Teixeira identified three waves of disruption (unbundling, disintermediation, and decoupling). Decoupling is the third wave (2006-still ongoing) where companies break apart the customer value chain to deliver part of the value, without bearing the costs to sustain the whole value chain.

Coupling

Coupling is a way for startups to move to adjacent areas as they create options to scale.

coupling
As startups gain control of new markets. They expand in adjacent areas in disparate and different industries by coupling the new activities to benefit customers. Thus, even though the adjunct activities might seem far from the core business model, they are tied to the way customers experience the whole business model.

Read Next: Business Model Innovation, Business Models.

Related Innovation Frameworks

Business Engineering

business-engineering-manifesto

Business Model Innovation

business-model-innovation
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.

Innovation Theory

innovation-theory
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.

Types of Innovation

types-of-innovation
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).

Continuous Innovation

continuous-innovation
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.

Disruptive Innovation

disruptive-innovation
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.

Business Competition

business-competition
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.

Technological Modeling

technological-modeling
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.

Diffusion of Innovation

diffusion-of-innovation
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.

Frugal Innovation

frugal-innovation
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.

Constructive Disruption

constructive-disruption
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.

Growth Matrix

growth-strategies
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).

Innovation Funnel

innovation-funnel
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.

Idea Generation

idea-generation

Design Thinking

design-thinking
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.

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