decoupling

What Is Decoupling And Why It Matters In Business

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.

Understanding the Customer Value Chain

customer-value-chain
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.

The customer value chain primarily represents all the steps customers take in order to get the product or service. Thus, that represents a journey, but from the customers’ perspective (what set of values the customer gains at each step).

In short, at each step of the experience customers gain a different set of values which make up the whole customer value chain. For instance, if I walk into a local book store, the whole experience will have different sub-values I gain as a customer.

As I enter the store, the value I get is the immersive experience of being able to feel, touch and walk through the store to find the book I need. As I see various books, I can open them, have a quick glance within, and why not, also read some chapters.

While I might be able to do the same on my Kindle, the immersive experience of the bookstore, makes it very attractive for a voracious reader. And yet, as I’m about to buy a few books, I might have to find them in various local bookstores.

Or I could, for instance, check if they are all available on Amazon at a lower price. On Amazon I’ll be able to find them all in the same place, and at a lower price (Amazon’s mission it’s all about variety and convenience).

While initially, as a customer I get the most of the experience. I can use any local bookstore to evaluate and choose the books I need, and yet finalize the purchase on Amazon, as I get convenience.

Over time, I might end up doing the whole process on my Kindle (as I can have all the books I need, right away).

This is, perhaps, how Amazon decoupled the bookstores’ customer value chain. Where in disintermediation, the company disrupts the distribution process, by cutting out intermediaries.

Decoupling is primarily about value and how it’s delivered to customers. So part of the experience is redesigned, and the decoupler identifies a core part of the value chain where it will add much more value compared to existing players.

The decoupler then, in theory, enhances the part of the value chain where there is the most business value (Amazon didn’t have to maintain physical stores) as it carries high margins and it is highly scalable (the whole experience can happen online).

This is an asymmetry which digital business models and platform business models have leveraged on to build multi-billion dollar companies.

Breaking down Decoupling

As discussed with Thales Teixeira: “Decoupling is this idea that I’ve observed across all these industries and these startups that I noticed is that they weren’t trying to really steal customers from what we call the incumbents, the large established companies.”

In short, as he pointed out Airbnb wasn’t really trying to steal the customer in the traditional sense from all the hotels in the world. If it was trying to do that, it would create hotels and maybe build it and get hotel rooms and then steal customers from Marriott or from the Ritz Carlton or from any other hotel.”

Instead, what Airbnb wanted to do was just “improve the matchmaking between people that had homes to rent and people that were trying to find, and not just hotel rooms, but actually a different experience to stay in somebody else’s home for a while.” And so that key activity of matchmaking is what Airbnb decided to do.

Breaking down entry barriers

When I interviewed Thales Teixeira he pointed out:

First, let’s be clear that decoupling is an ENTRY strategy. Due to the power of specialization, it allows small, cashless, resource-constraint startups enter a market, steal activities from much larger and cash-rich competitors and, in essence disrupt these incumbents.

As Thales pointed out, decoupling can be used as a strategy to reduce entry barriers in a world dominated by existing incumbents.

In that scenario, it is essential to map the customer journey and identify the single activity that the decoupler can perform better than the incumbent.

Once you found the activity to decouple, you have an excellent place to start. Indeed, to build a platform business, it is essential to master a core transaction, thus simplicity and focus on that might help scale fast.

Birchbox case study

An example is how Birchbox manufactured a different experience compared to Sephora, already a massive player in the beauty industry.

Birchbox, helped women sample beauty product more conveniently and with a subscription-based business model.

Thus, with a $10 per month the customer get five samples beauty products, delivered at home. Convenience, price and different kind of experience drove the Birchbox business model.

Therefore, Birchbox removed the hassle for customers to having to go to Sephora to source beauty products. While also pricing it at a convenient price, and delivered at home.

By identyiing the key activities Sephora customers have to go through. Birchbox understood they wanted to focus on sampling beauty product, as the most valuable part of the customer value chain.

And they specialized in that.

Initially, startups entering several markets choose to decouple as this makes them focus on one core and key activity in the value chain, which makes them grow more quickly and be identified with that .

How to decouple

To decouple you might want to ask a few questions:

  • Why do people want to buy it?
  • What do they want to buy the most?
  • What is the most difficult part of the experience and yet the most valuable?

Usually, the decouplers to offer a better alternative, and gain traction quickly might enter the market with a sort of Blue Ocean Strategy, where they offer more, for less.

blue-ocean-strategy
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

For that, we need to look at the three main currencies people use throughout the value chain.

The three customers’ currencies

Let’s take into account three main currencies:

  • Monetary currency: (money).
  • Time currency.
  • And effort currency.

As a decoupler if you can reduce costs for customers, time and effort taken, this might unlock major disruptive changes. Airbnb reduced these three costs. Uber reduced these costs. Amazon did the same.

airbnb-business-model
Airbnb is a platform business model making money by charging guests a service fee between 5% and 15% of the reservation, while the commission from hosts is generally 3%. Due to the pandemic, Airbnb is stretching its business model and experimenting with new formats like online experiences to transition toward fully digital experiences.

Connecting the dots

Disruption moves in waves. Unbundling helped to break apart existing products to offer only the most valuable parts of them. Thus, it worked at product level.

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.

Disintermediation, cut many intermediaries from the supply chain, thus working at supply chain level.

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.

Decoupling instead, works at customer level. Where the customer experience (the customer value chain) gets broken down, and the decoupler focuses only on a few key values, customers get to enter the market and quickly grow.

By reducing costs, improving convenience in terms of time and effort, the decoupler makes it a no brainer for the customer to go through this redesigned customer value chain, where the most valuable part, according to the customer, is offered at more convenience.

What’s next?

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

Those companies that once were startups, turned into tech giants, they managed to grab most market shares in their core industries.

Yet, as the web has become more intertwined, those tech players also moved in adjacent markets, where they could couple their service with others.

To cover more and more of the users’ experience, the coupling process is among the major forces shaping the business world in the last years and going forward.

Coupling as a growth strategy

Thales also pointed out:

After establishing themselves via decoupling, startups needs to enter new markets and/or come up with new products (or both). Many use coupling in the customer value chain (CVC) as a GROWTH strategy.

Only after a startup has mastered an essential activity and it has decoupled it successfully, it has a viable and robust business model. 

To expand further, it can identify adjacent activity to couple with the existing core activity.

From there, it can scale further. Thus, coupling works as a growth strategy.

The coupling era

While in the past startups had the advantage on their side to be able to decouple activities from tech giants.

My argument is that in today’s digital landscape, tech giants still act, in many cases, as startups.

They experiment quickly, release new products aggressively, and in most cases, focus primarily on customer experience if not obsession.

As a reference, back in February 2018, Google launched Google Trips. As Google explained at the time:

Planning a trip involves lots of searching for flights, hotels, things to do, itineraries and more. The process is often cumbersome because we have to use multiple tools to gather everything we need—especially on a mobile phone.

So Google Trips was announced as a way to “help users explore options and make decisions on their smallest screens.”

In 2019, Google Trips got even better, much much better:

Your trips on desktop

In short, Google entered at full speed and force the travel industry by enabling end users to perform the whole travel navigation from searching to booking.

As reported on skift.com, Expedia’s CEO, while answering questions in a media briefing at the Expedia’s Explore ’18 conference in Las Vegas, Okerstrom announced, “The internet has been littered with the bodies of companies put out of business by Google.”

And he went on by defining Google as its most significant competitors that made many entrepreneurs rethink the logic of the whole digital business world.

Travel and tourism search engines like Expedia, Booking, and TripAdvisor had thrived thanks also to the inability and lack of interest of Google to cover these segments.

As Google has grown to the size of a tech giant, it now has the power to reshuffle entire industries.

How do you counter that?

Defending from the coupling giant

I spoke to Thales Teixeira and he explained:

As companies grow and take on more CVC activities they tend to do so not necessarily by fulfilling each activity in the absolutely best way possible. Google Trips might be great if you already use Google Maps and Google Gmail, but if used alone it might be not as good as Kayak or something else. As Google couples, it does not couple optimally at each activity. Therein lies the opportunity for another start up to come up with a better product or service at a weak link of the coupling tech company.

Therefore, as an existing company, threatened by Google, you need to understand what the tech giant is trying to achieve by coupling.

In Google’s case, the tech giant is trying to lock in users, by providing an end-to-end experience. Thus, coupling will be very powerful where users already adopt the other Google’s products (like Gmail and Maps). There, the user will have an enhanced experience, all in the same ecosystem.

Yet, this experience will be diluted where users also adopt other products, and are not necessarily tied to the Google ecosystem.

In that case, as a company risking to be coupled by the tech giant you might want to focus on the set of users outside the Google’s ecosystem (DuckDuckGo has built a whole business on that).

Attacking the giant’s weak links

For as much, as the giant wants to couple several activities, to create a whole ecosystem where users can do pretty much anything.

There will be always a product or a set of experiences that are weak within a tech giant’s ecosystem.

For instance, in Google’s case, privacy is a big issue, given the amount of data the tech giant collects. This is the core of its business model. Its whole advertising machine is built on top of that.

That is why, companies like DuckDuckGo, gave rise to what I like to call “privacy-as-a-business-model” where the sole fact, that the company doesn’t track, or throws the data away on the go is a value proposition in its own sake.

Thus, it doesn’t matter if the experience on DuckDuckGo is not yet comparable to Google, as long as it is counterbalanced by the privacy protection.

duckduckgos-business-model

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here