Disruptors Sell What Customers Want and Let Competitors Sell What They Don’t

 
 
By "decoupling" activities that consumers value from the ones they don't, enterprising digital startups are wreaking havoc on established firms. Thales Teixeira discusses his research on the second wave of Internet disruption.
 
 
by Michael Blanding

Over the past two decades, entire industries have been disrupted by Internet competitors who "unbundled" their content and delivered it to consumers in new ways. Newspapers lost out to Google and Craigslist, record companies to iTunes and Spotify, and travel agencies to Expedia and Hotels.com.

Despite this upheaval, it seemed some businesses were immune to the digital onslaught—companies whose products and services couldn't be easily turned into 1's and 0's and put online. "A television set can't be digitized. A telephone can't be digitized. So those companies seemed to be safe," says Thales Teixeira, an assistant professor at Harvard Business School in the Marketing unit.

But not anymore.

The Second Internet Wave

A second wave of Internet disruption threatens not only electronics and telecom businesses, but also industries as diverse as taxi services, banking, and cosmetics. Unlike the unbundling that allows customers to pick and choose the content they consume (be it articles, music tracks, or airline tickets), Teixeira identifies the fueling factor in this case as "decoupling"—separating out activities that customers want from those that they don't.

Watching TV and watching commercials, for example, have traditionally gone together—the former creating value for the consumer, the latter capturing it for the company. When TiVo came along, it allowed viewers to record the shows they wanted without all of those annoying ads. Another early disruptor, Skype, takes advantage of existing wifi networks to allow users to make calls on their mobile phones without purchasing extra minutes.

“These startups are like fleas on the backs of dinosaurs too big to do much about it”

"Decoupling separates two or more activities that were previously forced to be co-consumed by an established firm," explains Teixeira, who details the phenomenon in a recent paper, The Decoupling Effect of Digital Disruptors, coauthored with HBS Research Associate Peter Jamieson (HBS MBA'14).

The companies spearheading the trend look for opportunities to deliver what is of most value to the consumer while stripping away what's not—leaving the rest to be delivered by the established player.

In the case of Skype, for example, the service decouples talk/text from the underlying (and expensive) connectivity provided by the telecom company. More recently, says Teixeira, it has fueled changing consumer habits as well, such as a growing preference for sharing items rather than owning them, and encouraging "showrooming" where shoppers visit stores only to test products—then buy them more cheaply online.

The user benefits from lower cost, lower effort, or saved time. Want to wear the latest fashions but can't afford the hefty prices for designer originals? Rent the Runway allows fashionistas to use those dresses and accessories at affordable rates. The company has decoupled the value part of the process—experiencing haute couture—from the non-value-creating portion of the transaction, buying expensive merchandise with a limited wear life.

PriceGrabber is a decoupler, too. Traditional consumer electronic retail stores depend on customers to come to their showrooms and tire-kick TVs and sound systems before buying. But the PriceGrabber app and those from plenty of other competitors allow consumers to find cheaper products online—even as they stand in the store. The service decouples the value-creating portion of the process—testing and trying—with the non-value portion—buying.

The automobile industry has been challenged as well, by ride-sharing firms such as Zipcar, Uber, and Relay Rides that allow drivers to use a car on demand owned by the firm, by the driver, or by strangers, respectively, without the cost of purchasing or maintaining one. Exploiting decoupling opportunities has allowed these upstarts to build a business on the back of larger companies without having to develop their own infrastructure first.

"We used to say that auto companies, telecoms, and big retailers weren't at risk of disruption within their industries, because there were such high barriers to entry; you could never compete with their scale," says Teixeira. "Decoupling allows you to say, we are not going to compete by building a car manufacturing supply chain, a telephony network or a big retail footprint. We are going to use that available infrastructure to our advantage. These startups are like fleas on the backs of dinosaurs too big to do much about it."

Decoupling Down The Consumption Chain

One key distinction between unbundling and decoupling is that while the former takes place only at the point of consumption, the latter can take place anywhere along the chain of testing, choosing, and purchasing products or services.

Source: Thales Teixeira

In some cases, companies are virtually banding together to replace nearly all aspects of a transaction. Take buying cosmetics. It used to be customers went to a cosmetics store such as Sephora to sample products, purchase them, and then return to replenish after supplies depleted.

Now they can sample cosmetics through Birchbox, which conveniently sends monthly samples to their home; purchase them for the first time through Amazon, where prices are often cheaper; and finally when they know which products they like, they can replenish them direct from cosmetics manufacturers such as Kiehl's, which offers subscriptions to loyal customers. By having each company specialize in one activity, the companies together do everything more efficiently for the customer.

Of course, managing all of these different suppliers of services can be a hassle for consumers. Customers implicitly weigh three factors in making a decision to decouple: money ("How much more cheaply can I buy it?"); effort ("How much more difficult will it be to get it?"); and time ("How long will I have to wait for it?")

Different people may place different value on those factors, he says, some potentially opting for the more expensive but more convenient one-stop shopping of traditional retailers—rather than say, spending the extra time showrooming for a television or booking a Zipcar.

On the whole, however, there is a clear trend towards more and more decoupling as innovative companies make it cheaper, easier, and quicker for consumers to do so using digital technologies and business models.

The Incumbents' Challenge

As competitors attempt to wedge their way between incumbents and their customers, decoupling presents a difficult challenge.

One counter-strategy is what Teixeira calls recoupling. "Intuitively, the first order of defense is to say, let's just not allow our customers to do it," he says. That might mean lobbying for legislation, suing in court, or making customers sign contracts that prevent decoupling. After Aereo allowed viewers to stream TV programs over the Internet by picking up broadcast signals, TV networks sued for copyright infringement and forced the startup out of business. Similarly, taxi companies are now actively lobbying local governments to curtail Uber.

“The whole issue of cutting the cord is a huge risk for [cable companies]”

Other companies use alternative means of recoupling. Digital video recorder companies like TiVo have grown popular with TV watchers in part because of the ability to fast forward through ads—enabling the decoupling of TV shows from commercials. To counter that threat, some TV programmers have increased product placement and even inserted pop-up ads in the programs themselves forcing those who watch the show to watch the ad.

Some of the hottest battles are being fought over showrooming—the practice whereby consumers visit a store to check out items in person before buying cheaper online (decoupling browsing from buying). Celiac Supplies, a specialty food store in Brisbane, Australia, charges customers $5 for "just looking," refunding the fee if an item is purchased. "The problem with this approach is that it's trying to build a dam around your consumers and force them to do something they are not naturally inclined to do," says Teixeira. "Sooner or later they will find a way out, or a company will find a way out for them."

A better strategy to follow is "rebalancing," which realigns a company's activities in such a way that value is claimed by the firm every time the firm creates it. Best Buy has taken a bite out of showrooming not by forcing customers to buy in-store, but rather by rebalancing its own revenue sources. Realizing that its manufacturers have the most to lose if customers can't try out their wares in store, Best Buy has begun charging shelving costs to electronics makers in order to feature their products. "If you buy or don't buy, Best Buy is still making some money," says Teixeira. And with that increased revenue, the company is now able to offer a "price-match guarantee" that allows customers to instantly buy at the same price for which a product is advertised online.

In another rebalancing tactic, some American telecoms have recently ceded the field to Skype by providing unlimited calling for a flat fee with many phone plans. "Essentially, they are saying that this activity no longer has value to consumers, so we can't capture value ourselves," says Teixeira. At the same time, these companies have increased charges for basic connectivity to the Internet, which customers need to access services such as Skype.

Decoupling The Future

Now the decouplers are turning to the future.

One industry Teixeira sees as ripe for the process is banking, whose model relies on offering checking and savings accounts to get customers in the door and ready to be marketed to with more profitable products such as home mortgages. Already, entrepreneurial competitors are pecking around the margins of banking—Paypal offers essentially the equivalent of an online checking account, and other companies are getting in on the action.

Another industry he sees as vulnerable is television and cable, with joint risk of decoupling and unbundling. While they may have won the battle against Aereo, their business model, which forces customers to buy programming by the bundle rather than a la carte, leaves cable companies vulnerable to competition online from folks like Netflix, Hulu, and Amazon Prime, which have all left commercials behind in favor of a subscription model.

"The whole issue of cutting the cord is a huge risk for them," says Teixeira. It's likely a sign of things to come that sports network ESPN, available only on pay-cable services, this month announced its participation on Dish Network's Web-based Sling Box service.

Not every company is susceptible to decoupling, however. In some cases where it is too costly, labor intensive, or inconvenient for customers to wait for services, customers may prefer to deal with traditional firms.

"Some products like electronics you don't mind waiting a few days for Amazon to deliver—others like fresh groceries you need it now, in the store ," says Teixeira. "It's unlikely people will ever decouple showrooming from buying milk online."

If the recent explosion of digital disruptors is any indication, however, few companies or industries are immune from decoupling by enterprising entrepreneurs able to find ways to extract value from others' established infrastructure. Established companies would do well to brace themselves for the attack of these fleas—or else risk going the way of the dinosaurs.

About the Author

Michael Blanding is a writer based in Brookline, Massachusetts

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    • Blaire Palmer
    • CEO, That People Thing
    We've worked with a number of companies who have game-changing start ups on their tail. The challenge is, in part, to work out what is valued and what isn't in order to decouple the two. They are so close to their company they can't see it until an upstart points it out...by which time it's too late. But the other problem is cultural. There's real resistance to accepting that your industry is quickly becoming a dino. Clients make all sorts of excuses, refusing to see the new-comers as a threat, coming up with quick-fixes that will return revenues to a viable level (short term) and allowing their own love for their industry and anger at its demise to cloud their thinking. The sensible thing might be to decouple, as you suggest. But leaders are human beings. And they often have very powerful reasons for not doing the sensible thing.
    Blaire Palmer
    Author, "What's Wrong with Work"
    • Rafael Rosales
    • Planning Chief, STYBA (3PL Company in El Salvador)
    Brilliant article!! Captures perfectly what is currently happening. All the concepts can be also applied to the logistics services that a 3PL or 4PL company offers.
    • Peter Tempelman
    • Program Manager, ASRE
    Great article (and working paper)! It made me think about decoupling in higher education. I have been in formal (university) studies that included courses that I would rate as 'non value creating'. As a working professional, my time is limited, so I would like to be able to only take value creating courses. Of course, in higher education the credentials of the institution are important, as is the network function. But within the context of life long learning, I think that a large portion of the traditional 'brick and mortar' (higer) education is ready to be decoupled. I don't think the current way MOOC's are offered will have a decoupling effect yet, but I've seen examples of online course providers that do challenge the traditional system. Working in higher eduction myself, I increasingly place more emphasis on the value creating aspects of the studies we offer. Especially the basic courses are ready to be decoupled I think.
    • Frankie Contreras
    • Managing Director, USA ES TRADE, LLC
    Fantastic article...it analyzes the future business models using technology as a tool to market services or products to tech educated consumers.

    In theory this is the future, by using technology to advertise services or products to consumers, but in practice the old models of one-on-one basis is still a fundamental way to grow a company.

    In essence a combination of both models, using technology as a tool to get to consumers and applying the one-on-one basis to get to the consumers are still relevant methods of business in many industries, specially in the olive oil industry in which olive tasting is needed.
    • Suman Bhui
    • Engineer, BHEL
    Nice article which has highlighted the current marketing techniques and its pros and cons for different industries.
    Some ideas which is already taken by industries is well thought out which can benefit everyone as for retail marketing,returning a product if the customer is not satisfied with the fitting or looks,right now the option is available in case of any defect but if this can be implemented then the problem of showcasing and customer unsatisfactory feelings can be avoided as done by Birch Box.The re-balancing concept is a very practical and sustainable solution to increase the revenue of the manufacturers.
    This new changes in marketing has opened many new industries and new concepts thus provides a chance to many new comer to establish them in an already established market thus evening out the competition.So the opportunities are many.
    • Earl Young
    • ex-CIO, retired
    One of the Top 10 business articles I have ever read. Wonderfully written and logical throughout. Thank you.
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited
    With digital explosion, such changes are bound to take place. In India, one of the key initiatives of the present regime is to go digital whole hog - " Digital India" is the slogan !

    E-marketing is quickly becoming the order of the day. It has definite advantage by way of saving time and expense, the latter due to the heavy discounts offered by these marketers. At one stage I had an apprehension - if you receive a defective item, then what? However, once I received an electronic item which gave a problem, my phone call resulted in immediate replacement and this too without any argumentation. In contrast, when I purchased a washing machine from a retail store, it took long to have a defect set right. No match at the quality of service leading to customer delight. Obviously, the on-line marketing approach has to succeed and its share in sale of goods will go up progressively.
    I enjoyed and learned a lot from this succint article for which Michael Blanding deserves due appreciation.
    • Mike Mehta
    • Director - DCSS Systems, DHS, Georgia State
    Excellent post! Loved reading it.

    "THESE START-UPS ARE LIKE FLEAS ON THE BACKS OF DINOSAURS TOO BIG TO DO MUCH ABOUT IT"

    It is lot cheaper to fuse two sheet metal pieces together in making a plane rather than using thousands of rivets which require special skills as well but companies like Boeing cannot apply this because documentation cost alone may go so high not to mention the process to pass FAA requirements...

    But big companies have big plus of having a lot of cash and resources and good CEO with good strategies can make it happen in my opinion.