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.

duckduckgo-business-model
DuckDuckGo makes money in two simple ways: Advertising and Affiliate Marketing. Advertising is shown based on the keywords typed into the search box. Affiliate revenues come from Amazon and eBay affiliate programs. When users buy after getting on those sites through DuckDuckGo the company collects a small commission.

Other resources for your business:

Connected Business Phenomena

Vertical vs. Horizontal Integration

horizontal-vs-vertical-integration
Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.

Supply Chain

data-supply-chain
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distributed to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.

AI Supply Chain

ai-supply-chains
An AI supply chain starts with the sourcing of data, which is produced by consumers. As this data gets stored on hardware, it goes through a first refinement process via software. Then it’s further refined, and repackaged by algorithms, and stored in data centers, which work as the fulfillment centers.

Backward Chaining

backward-chaining
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.

Decoupling

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.

Entry Strategies

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

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

reintermediation
Reintermediation consists in 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.

Scientific Management

scientific-management
Scientific Management Theory was created by Frederick Winslow Taylor in 1911 as a means of encouraging industrial companies to switch to mass production. With a background in mechanical engineering, he applied engineering principles to workplace productivity on the factory floor. Scientific Management Theory seeks to find the most efficient way of performing a job in the workplace.

Poka-Yoke

poka-yoke
Poka-yoke is a Japanese quality control technique developed by former Toyota engineer Shigeo Shingo. Translated as “mistake-proofing”, poka-yoke aims to prevent defects in the manufacturing process that are the result of human error. Poka-yoke is a lean manufacturing technique that ensures that the right conditions exist before a step in the process is executed. This makes it a preventative form of quality control since errors are detected and then rectified before they occur.

Gemba Walk

gemba-walk
A Gemba Walk is a fundamental component of lean management. It describes the personal observation of work to learn more about it. Gemba is a Japanese word that loosely translates as “the real place”, or in business, “the place where value is created”. The Gemba Walk as a concept was created by Taiichi Ohno, the father of the Toyota Production System of lean manufacturing. Ohno wanted to encourage management executives to leave their offices and see where the real work happened. This, he hoped, would build relationships between employees with vastly different skillsets and build trust.

Dual Track Agile

dual-track-agile
Product discovery is a critical part of agile methodologies, as its aim is to ensure that products customers love are built. Product discovery involves learning through a raft of methods, including design thinking, lean start-up, and A/B testing to name a few. Dual Track Agile is an agile methodology containing two separate tracks: the “discovery” track and the “delivery” track.

Scaled Agile

scaled-agile-lean-development
Scaled Agile Lean Development (ScALeD) helps businesses discover a balanced approach to agile transition and scaling questions. The ScALed approach helps businesses successfully respond to change. Inspired by a combination of lean and agile values, ScALed is practitioner-based and can be completed through various agile frameworks and practices.

Kanban Framework

kanban
Kanban is a lean manufacturing framework first developed by Toyota in the late 1940s. The Kanban framework is a means of visualizing work as it moves through identifying potential bottlenecks. It does that through a process called just-in-time (JIT) manufacturing to optimize engineering processes, speed up manufacturing products, and improve the go-to-market strategy.

Toyota Production System

toyota-production-system
The Toyota Production System (TPS) is an early form of lean manufacturing created by auto-manufacturer Toyota. Created by the Toyota Motor Corporation in the 1940s and 50s, the Toyota Production System seeks to manufacture vehicles ordered by customers most quickly and efficiently possible.

Six Sigma

six-sigma
Six Sigma is a data-driven approach and methodology for eliminating errors or defects in a product, service, or process. Six Sigma was developed by Motorola as a management approach based on quality fundamentals in the early 1980s. A decade later, it was popularized by General Electric who estimated that the methodology saved them $12 billion in the first five years of operation.
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