disruptive-business-models

A Guide To Disruptive Business Models With Thales Teixeira [Lecture]

For this interview, I have with me Thales Teixeira, professor at Harvard Business School and author of “Unlocking the Customer Value Chain,” (you can download a free chapter of the book here) which is an incredible book and an incredible reading, especially if you’re trying to understand how today’s business world works.

I asked Thales a few critical questions to understand the business landscape and each of them uncovers insights that will make you a better business person!

What brought you to study business model disruption and business innovation?

Thales Teixeira: I joined the Harvard Business School in 2009 and I was doing research that followed from my Ph.D. in the area that eventually I called the economics of attention. And at that time my goal was to really understand what was happening in the market for attention.

The market for attention is composed of the suppliers of attention, which are people, individuals, and the demanders or the buyers of attention, which are companies. They buy attention from media companies to use for advertising and brand building purposes. And that was my mainstream of research.

But about that time, many companies that I worked with started asking me about how to deal with digital disruptors. And so I visited many so-called disruptors of the time. I visited 2010 Facebook and I asked the executives there, “how are you planning to disrupt the media space?”

And in a room, the executives would say, “Professor Teixeira, this is what we’re doing.” And they started explaining me the process and I just listened and recorded. And then I visited other startups at the time, or disruptors that grew tremendously fast, just like Uber, Airbnb,

I’ve visited Netflix. Every time I would ask them the same questions, “How are you planning to disrupt the hotel industry or the transportation industry where the media industry, the TV industry,” and every time I heard something like, “Professor, we’re doing it very differently from the others. This is what we’re doing.”

But the more I heard that they were doing things differently, the more I realized there was a common pattern. They were doing all virtually the same things, the same strategy. The only difference is that the applied it in their industries in a very different manner. So that’s how I got to really think about there is a pattern, a recipe, a common approach to digital disruption that works across every industry, every country that I observed.

What’s for you that the most effective definition of a business model?

Thales Teixeira: Business models have to achieve two purposes. Any business model, if you think of it has to basically create value for a customer. So you need to identify a customer who is the value being created for. And the other point it has to capture some of this value for itself. Or if it doesn’t make money, it doesn’t really survive.

And so capturing a portion of this value in the form of revenues and profits and figuring out who this value’s captured from is very important. And not necessarily you have to create value and capture from the same type of entity or individual.

For example, supermarkets today, they create value for shoppers. If you go to the supermarket, you’re basically buying products for yourself and your family and they create value for us individuals by providing all of these products at reasonably good prices.

Yet a few people understand that many supermarkets today make more of their money from the suppliers and the manufacturers of these products by charging them what we call slotting fees, which is rents for putting products on the shelf that corresponds in the US for example, much more money than actually margins on selling the products that are in this store.

So they create value for the shopper and they capture value from manufacturers and other retailers. And back to your point, this is the purpose of a business model. Create value for somebody. Capture value from somebody might be the same or it might be another one.

Gennaro Cuofano: I like the fact that you highlight that when you want to start with a business model, you need to be focused on the customer. That implies the understanding of the customer value chain.

What is the customer value chain and how does that work?

Thales Teixeira: 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.

So for example, if you want to buy a television today your value chain goes something along the lines that you recognize that you need a new TV. That’s the first part. Then you think of a few places to go to look for options. That’s a second activity.

In the US you would probably go to a major retailer, Best Buy. So you go to Best Buy, and then you look at all of the available options and you’ve screened the options for a few TVS. Let’s say I want a 50-inch TV under $1,000.

You get somebody to help you and then you figure out which you like, maybe you like the Samsung 50-inch and then you get it, you ask for it, you pay for it, you take it home, you install it, and then you use it. And then finally a few years later you dispose of it. Either resell it or throw it away.

So all of these activities are part of the customer value chain. And we can do this mapping of value chains for any customer. It doesn’t need to be an individual. It can be a business. Businesses have value chains when they’re acquiring products and services. The government has it. For whatever product you can think of, or service, we go through a series of key activities in order to acquire those goods.

Gennaro Cuofano: So, this is really a mapping of the journey that your customer, business, or whoever you plan to create value along the way.

And then you were saying before that you managed to speak with companies that were disrupting the business world and they were saying something along the lines, “We’re doing something different.”

But you actually spotted a pattern, which really helps to analyze what’s happening today in a very simple but effective way. You called it decoupling! So with decoupling, you actually understood that there is this process, this trend which is happening right now in your business world?

What is decoupling and why is it so important?

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.

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.

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.

If you take, for example, the beauty industry, the big beauty retailer around the world is called Sephora. So most women and men also go to Sephora to buy cosmetics and beauty products.

And a few years ago came one of the startups called Birchbox and said, “We’re actually going to help women sample beauty products much more conveniently.” So they created this business model of subscription boxes.

How did Birchbox break the customer value chain?

Basically, you pay $10 a month and you get four or five samples of beauty products in the convenience of your own home. So you don’t need to go to the Sephora store to sample beauty products and figure out which ones work for you, which are the new products out in the market.

You just receive samples at home. So it’s much more convenient in that regards. In the same manner, Birchbox decoupled the customer value chain by saying, “Look, we know it’s important to start the process of buying beauty products by sampling beauty products. So instead of you going to Sephora, just subscribe with us and we’ll send the samples to your home.”

And then afterward when you realize which products you really like to buy the full-size item, you can even go to Sephora and buy it or go Amazon and going anywhere else. But in that regards, Birchbox decoupled the customer value chain because it took away not all of the activities that were being provided by Sephora, but just one key activity which is the sampling of beauty products and that is the decoupling.

When you go across all these markets, you see that disruptive startups are choosing one activity to do for the customer much better instead of trying to substitute all the activities that are being done by the established company for themselves. They really specialize in a key activity in the customer value chain the customers are not fully satisfied with.

Gennaro Cuofano: Another key aspect that probably you identified through your research is that in many cases, those companies are not innovating through technology, actually it is the opposite. They’re innovating through a business model. So it’s more like really a process of, as you said, understanding of what link in the value chain they could break so that they can deliver at a different business model.

Is disruption about business model innovation?

Thales Teixeira: So absolutely. And let’s just start with this realization that we are infatuated with technologies, right? There’s lots of companies out there, the bigger, more established companies that have used technology to succeed and gain a reign in the market. So we can look at Apple, we can look at Google.

These companies created new technologies and that drove their success. But the vast majority of startups and tech companies out there that are considered tech companies.

When you look at what started their process of disrupting other markets, which means stealing huge market shares in a short period of time, it was not due predominantly to a major technology.

Didn’t Uber start as a tech company?

Uber launched in 2008 and when it launched you would download an app and basically, if you wanted a car to come to you to pick you up to take to the airport, you would text or call them.

And on the other side of the line somebody who received this text message or a phone call and would try to call up other car companies that had what we call black cars, essentially kind of high-end limousines or high-end cars, they would call them up essentially just like a taxi dispatch service operates, would start calling and saying, “Oh, can you go pick up this person?”

And then they would respond with a text message or email saying there’s a car on their way. And probably the only innovation at that time was something quite simple, which is for the first time you saw in a map, a little car coming to pick you up.

So you knew what was happening, but it was not automatic as it is today. You press a button and there’s nobody else actually trying to route to cars to you. It’s done automatically through an algorithm.

But at the time, this was not the case and it grew, it grew because it was convenient for customers and people had the assurance that their cars were coming, but they had no new innovative technology that nobody else had.

It was fundamentally a service for the customer that was a better experience and a new business model. You didn’t have to pay when the car left you, you didn’t have essentially get a taxi and go through all the hurdles and hassles of hailing a cab.

Gennaro Cuofano: So it’s really not about the technology, but it’s about business model innovation. That’s a great point which I want to stress and highlight because it gets really confusing when you look at the companies that we call “disruptive,” we always think of them as companies that innovated with their technology when instead, as you pointed out, is about business modeling.

And in your research, you also pointed out there were three key phases we went through with the advent of the web and now we’re living of course, in this phase which is more about decoupling.

What are the three phases of digital business disruption?

Thales Teixeira: When I started to try to understand digital disruption, basically what my initial hypothesis, what I thought and everybody else probably thought at the time is that disruption comes kind of consistently and frequently throughout time.

Every week, every month there’s a new startup, there’s new technologies, new business models, new ideas, and every month some market is kind of going into a disruptive phase, right?

But what I realized is that’s not the case. The disruption forces come in big discrete chunks of time. It’s not continuous, but at one moment there’s something that happens and many, many markets get disrupted or the process starts, and that’s why I call it the waves of disruption. There’s a wave that comes and then it subsides. And then there’s another wave that comes.

Unbundling in a nutshell

The first wave started around 1994, 1995 when the internet becomes popular and essentially the first wave of what today, we call unbundling. Basically before, as a consumer, I would have to buy a newspaper that was a series of essential products inside the newspaper.

A newspaper, has articles, restaurant reviews, classified ads, comic strips, all sorts of things. And there’s no way for me to just buy one or the other. I have to buy the whole bundle.

The same thing. If I was to buy a CD 20 years ago, I had to buy 15 tracks of songs. I couldn’t buy one at of time. Rarely. The same thing with textbooks and many other types of media. What came with the beginning of the internet and popularization of the internet, where companies started to unbundle that.

So Google would provide me one article at a time to read, Craigslist would provide me just the classified ads. Yelp would provide me just restaurant reviews. That was the first wave of unbundling and from 1994 to about 1999, 2000 there was a big wave.

All of these startups came to disrupt and unbundle, breaking the product into pieces and selling or giving it for free to customers. This waves subsided.

Disintermediation in a nutshell

And then in about the year 1999 to 2000, a second wave came in. The second wave was very different in the sense that companies that offered products through intermediaries to the consumer, so think of travel services. The travel agent would get hotels and airlines and service and tourism activities in what put them in a package and give it to consumers.

In this second wave of business model innovation. These companies started going direct to the consumer. So airlines started selling airfare, direct to consumers, hotels direct to consumers and that is what we call disintermediation.

Basically, the simple idea is to cut out the middle man. There was a lot of businesses disrupting markets that we’re cutting out the middle man and offering their products and services direct to consumers.

That wave peaked in 2000 in about 2005 most of it was done. Now what I’ve observed at this third wave that’s been happening in the last few years is this idea of decoupling instead of breaking the product or part which is unbundling or breaking the supply chain apart, which is disintermediation. This third wave is breaking apart the customer value chain.

Summarizing the three waves of unbundling, disintermediation and decoupling

Gennaro Cuofano: That’s a very interesting point. To recap we had three waves that accompanied the rise of the web:

  • In the first wave (1994-99) companies used unbundling forces to break products. For instance, you took a CD and instead of having people listen to the whole Album they could finally start to listen just to one song.
  • The second wave (2000-2005), companies used disintermediation as a way to break the supply chain. For instance, airlines starting to sell airfares directly to consumers.
  • And a third wave (2006-still ongoing) which is decoupling. Or companies breaking apart the customer value chain to deliver part of the value.

Thus, we moved from breaking up the products and supply chain. To break up the customers’ value chain!

So we went from as you said, breaking apart the product supply chain and then now it’s about the consumer, the customer.

How do we know what the consumer is looking for? And how to use decoupling in our favor?

Thales Teixeira: That’s a great question Gennaro because in each different industry people tend to think that customers want different things. And basically, if you would summarize, why do people want to buy it? Which cars do people want to buy? Which furniture did they want to buy? Which food do they want to buy? Which hotels do they want to stay in?

And obviously, in any industry, there are particularities for customers’ preferences. And many times we talk about quality. Customers want quality cars, quality hotels, quality furniture, quality this and quality that.

When you look what drives major decisions, disruptive decisions, which means customers in mass change their purchase habits in a short period of time dramatically, is at the end of the day: costs.

Customers want to get the products and services that they desire for the lowest cost possible. But the way I think about cost is not just monetary costs, it’s not just what they’re going to pay for it.

Essentially it’s the entire costs that are involved in acquiring these products and services.

  • So one of them is actually money,
  • But the other one is time. What is the time it takes for me to search for a hotel? What is the time it takes for me to receive my package through the mail if I buy on e-commerce? Time is an important element.
  • The third important element is effort. How effortful is it for me to acquire, to compare and acquire the television that I want? How effortful for is it for me to get a car to my door that will take me to the airport.

The three customers’ currencies

So when I think about customers in different markets, I always tell my students that you should think about those customers as having three pockets with currency.

They have:

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

Their decisions are going to change based on who can reduce those three costs the most. If you can reduce those costs, that’s when we observed the major disruptive changes. So Airbnb reduced these three costs. Uber reduced these costs. Amazon dramatically tries every day in every market it is to reduce these costs.

Gennaro Cuofano: The most interesting part to me is that you can use the same framework to understand any industry. In the book, you also identified the fourth element, branding. In the marketing world, we highlight, and emphasize branding, with phrases like “Branding is everything.”

How important is branding in consumers’ choices?

Thales Teixeira: I think that anybody that is in business will know how brands are important. There’s no benefit in keeping talking about the value of the brand. What is new and is a game changer to me today is the reduction in the value of branding.

Consumers before would be loyal to brands. People that liked Nestle chocolate would always buy Nestle chocolate. People who like BMW would keep buying BMW. And you could see that the loyalty to brands of manufacturers and service providers was very high.

What we’re observing more and more is the reduction in the loyalty of brands. People are looking at available new options that have a new brand that they don’t know of. They’re not really aware of it or they don’t have the experience, but they’re willing to risk to try out new brands, right? Think of in the beginning, why did people even try Uber?

There’s absolutely no reason for you to try Uber. There’s a risk. You don’t know what’s going to happen. You don’t know the business model or you don’t all these things. Yet Uber launched and it grew tremendously fast.

In the same goes on for startups, startups are taking advantage of the fact that people want better value, cheaper, faster, easier. And people are willing to experiment with these new startups because they have better customer experience, not just in the process of buying these digital products, but buying, using, and then disposing of or repurchasing these products.

And in doing so, they’re willing to give up the safety net of large established brands like Nike, like Coca Cola, like IBM and you name it. So what we’re seeing in financial markets today is that these big businesses, they need to innovate and they need to offer new things to customers because they can’t rest on their decades of having a very large recognizable high equity brand as before. Innovation, consumer-driven innovation, is now a necessary condition for you to stay in a leadership position in the market or else you will be disrupted.

Gennaro Cuofano: That’s great a point. As you also pointed out in the book, The Dollar Shave Club model which after years of Gillette dominating the market with their business model (razor and blade) it actually managed to disrupt it in a very short period of time. Even though Gillette has had such a strong brand.

In this context, are traditional business tools, like Porter’s Five Forces, still useful?

Thales Teixeira: Michael Porter is my colleague and I highly respect him. He did a tremendous job and his work was published in 1985 and he did a tremendous job to really show the competitive drivers in major markets.

And so his five forces and then he came out with a sixth force, and that allowed you to understand competition. And in markets in which you have many, many buyers, many customers, and few suppliers, few competitors.

It tended to be the case that competitors dictated much more of your profitability than actually customers or buyers. And so companies went into new markets and they realized it was much more important to track your competition and respond effectively to your competition than to consumers.

What has changed in the past 30 years is now many markets are saturated with suppliers, with companies offering products and services. Before you only had Gillette and Schick, now you have a variety of other manufacturers of razor blades and so tracking competitors, responding to competitors, understanding the forces that drive profitability in your industry is only the first step.

What really is going to make you succeed is really being customer-focused, understanding your customers, their priorities, and delivering it for them to the point that competitors aren’t really as impactful in the profitability of your business as understanding shifting customer consumer trends.

So I’d say that my framework is a complement to that in that it helps you look in each market, understand what customers want and basically, they want specialized improvement in costs. And if you deliver that, you will be far more successful than if you just keep tracking customers.

And when I go to companies, people tend to think that customer centricity is being kind of careful and being nice and being appreciative of your customers and sending them emails and thanking them. Well, that’s not what customers want!

Customers don’t want a relationship with companies. Customers want products and services that are cheaper, faster, more convenient and better than the alternative. So wherever you’re looking at, if you don’t see a good product or service, can you make it better? That is the way to enter the market to disrupt by decoupling and do something small but something much better than others.

How should I start a disruptive company today?

Thales Teixeira: I would say first just think of it as a consumer or a customer, or business to business customer, or what are these products and services that you’re not fully satisfied with?

Incumbents require you to do a series of activities with them, some are probably good, some are probably not that good. For those which are not that good. They function as your beachhead, as your entry gate into a market.

You’re going to try to look at it one activity that you can do better, that customers are not fully happy. You can do better in a cost sense or deliver it digitally, which generally using these digital technologies allow you to reduce the cost for the customer of that activity. And once you do that, you will notice that you’re going to start stealing customer activities from the incumbents.

And that is the way for you to gain a foothold in the market by offering these. So think of it as all of these opportunities, but not to really replicate what’s available. Just a way to think from doing something specifically better.

To give a very trivial example, there are many hair salons in the US, and generally hair salons for women. They cut your hair and they wash your hair and dry your hair. And there’s a company that came here and is growing really fast. It’s called Drybar and it said, “You know what, they cut your hair well, but they don’t really dry your hair very well.”

And so for women who want to have their hair dried better, they can just go to Drybar. And it’s like a little store and now they have hundreds of hundreds of stores all across the US that are just doing one thing better, drying women’s hair faster, more convenient to book a time and cheaper and basically with not much use of technologies.

If you start with the technology first, you’re going to try to find a place to use a technology that’s very complicated to start with the customer pain point in an activity.

Is specialization the key to decoupling?

Thales Teixeira: Specialization is this big force of creating opportunities for startups or else you’re going to compete with big companies that have thousands of employees and billions of dollars and things like that.

There’s no way to win unless you specialize and see their weak points. And so when I look at the customer value chain, I have a recipe for disruption in my book that’s a five-step process:

  • The first step is to map out the customer value chain.
  • The second step is to figure out those activities that create value, those activities that capture value, and those activities that erode value.
  • Choose one of them, and your goal is to basically decouple by breaking the links from those activities so you can steal it from incumbents.
  • Increase the specialization forces. The way you do that is by reducing the monetary, the time and the effort costs.
  • And once you do that, you will understand that those large companies that are going to lose activities that are going to respond, but there’s a chapter in my book that shows what are the typical responses so you can evaluate and preempt before they respond to you, you can preempt them and then that creates your sustainable business model.

What’s next? Is decoupling the main disruptive force in the coming decade?

Thales Teixeira: Well personally, I think that decoupling and the analog after you decouple how you grow, you grow by adjacent stealing even more of these adjacent activities. This is the next trend that I’m seeing when I look at Alibaba in China, Amazon in the US, Airbnb also.

What they’re doing is they’re doing a process of coupling new activities to their decoupled business model and this is the way they are growing. For example, Alibaba started in e-commerce and then it went into payments.

Then it went to the logistics then it went into search engines and then they went into software hardware. This is a process known by coupling and chapter eight of my book explains how to go about this.

So this next wave is actually coupling and we’re going to see more and more businesses go that started in one industry, digital industry, and then they move to very, very disparate and different industries and they do so by kind of coupling these activities in a very smart way that benefits the customer.

Gennaro Cuofano:  So from decoupling to coupling! Thank you very much for joining me for this conversation. It was great having you.

Key takeaways

  • 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).
  • Decoupling consists of identifying activity in the customer value chain that can be performed separately from the others. In that case, the decoupler provides a better value for the consumer for that activity, while it captures business value away from the incumbent.
  • When decoupling companies should take into account the costs for consumers. Costs are not just monetary, but they relate to three pockets of currencies: monetary currency: money. Time currency and effort currency.
  • A brand is important, and while it helps to lower the risk for consumers in making certain choices; brand loyalty has become less relevant today compared to a few decades ago.
  • Companies that succeed in decoupling are those that manage to be customer-focused, so to deliver better value at a lower cost (intended as monetary, time and effort).
  • Specialization is the key to decoupling as it helps to deliver better value at a lower cost in a specific activity of the customer value chain.
  • Coupling might be the next wave, where companies that are taking over several industries by moving in adjacent spaces that might benefit the consumers they are already serving.

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Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which he brought to reach about a million business students, professionals, and entrepreneurs in 2019 alone | Gennaro is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate and become profitable | Gennaro is an International MBA with emphasis on Corporate Finance | Subscribe to the FourWeekMBA Newsletter | Or Get in touch with Gennaro here

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