If women wanted to shake up their makeup regimen 10 years ago, Sephora was the place to go. Beauty product junkies loved Sephora’s candy store-like display of sample-size face creams, glittery lip glosses, and eyeshadows in every shade imaginable, allowing them to test out new products at non-committal prices.
That is, until Birchbox came along in 2010 with an innovative offer: Pay a monthly fee and receive a curated box of beauty samples by mail.
“They said, ‘We're going to start off doing this one part of the customer value chain, which is helping you identify the better products, and we're going to do it more conveniently,’” says Thales S. Teixeira, author of the new book Unlocking the Customer Value Chain: How Decoupling Drives Consumer Disruption, which debuts tomorrow.
“Incumbents tend to respond to decoupling by gluing back the part of the value chain that was broken.”
Many established companies lament the disruption they’re facing at the hand of technologically savvy startups. But Teixeira, the Lumry Family Associate Professor of Business Administration, argues that these newcomers simply spotted and served an emerging customer need faster, taking market share from established companies that didn’t see them coming.
Are companies looking at disruption the wrong way?
Danielle Kost: In your book, you argue that technology isn’t the main force hobbling many companies today—it’s changing customer needs and behavior. How did you come to this conclusion?
Thales Teixeira: When I started eight years ago looking into what was going on in certain industries, what came out initially was this idea that it was technology, right? We all talked about Google, Amazon, Facebook, and Apple. But in many industries, both the disrupter and the disrupted had similar technologies and similar amounts of technology.
The common pattern was that the majority of customers in those markets had changing needs and wants, and their behavior was changing.
Kost: Many of the companies you’ve studied gained a foothold in the market by capturing one piece of the customer value chain, or by following the steps a customer takes to select, buy, and consume a product or service. You call these situations “decoupling.” Could you give an example?
Teixeira: A great example of decoupling is an insurance startup called Trov. It’s an app that allows you to quickly insure expensive belongings for short periods of time. If you're traveling to Rio de Janeiro next week and you just bought a $700 camera that you fear you’ll lose, you can upload some information about the camera to the Trov app, swipe right, and insure it from the moment you embark. One week later, when you come back, you can swipe left and it will stop insuring it.
You don't have to do all the activities you normally would do with a traditional insurance company. You don't have to talk to an agent, look at the policies, list the things you own, pay for the policy, use it, and then cancel it.
[Most] insurance companies don't want to sell you one week of insurance for one product. They have thousands of employees, big budgets, and huge infrastructures, so that they can offer more or all of the activities in the customer value chain.
Kost: Incumbents that survive disruption often embrace it and change their business models to forge new sales channels, revenue streams, and customer segments. Could you give an example?
Teixeira: Incumbents tend to respond to decoupling by gluing back the part of the value chain that was broken. The other alternative is you just live with the fact that it's broken. That's called “preemptively decoupling.” Instead of waiting to be disrupted, you just break it.
When Amazon started selling electronics online, it created apps that encouraged customers to go to a store and check out the prices and products, but order them at Amazon. This is called showrooming.
Best Buy initially tried to prevent customers from showrooming. They considered changing the barcodes on products to make them hard to search for online. The company even tried to use signal jammers, like the ones they use to keep prison inmates from using cell phones.
Eventually Best Buy executives realized that Amazon and showrooming are not going away. They decided to charge manufacturers for putting those items on the shelf. When a company like Samsung puts TVs on display at Best Buy, Samsung is benefiting whether you buy it from Best Buy or Amazon. So Best Buy decided to charge for that value they create.
Kost: Many companies obsess about their direct competitors—how to undercut their prices, outpace them in R&D, or steal their talent. You argue that companies should focus on customers and meeting their needs. Why is that so hard?
Teixeira: You have few competitors, so it's easy to look at what they're doing and emulate or respond. When Coca-Cola launches a new product or reduces prices, it's easy for Pepsi to identify that. It's easy to go to the board or to your boss and say, “Our competitor is doing this. We should respond.”
It’s very hard to understand your customers because you might have millions of them scattered around the world. It's hard to see what they're doing and to understand why they are doing what they're doing.
"In most cases, consumers are disrupting markets, not startups and not technology."
Kost: So many executives are trying to predict the next wave of disruption. You recommend that executives look for early signs of behavior change in seven consumer categories. Why?
Teixeira: When I started doing this research, I realized that 90 to 97 percent of consumer spending is concentrated in seven categories. I call them the categories that better consumers, from their point of view: where they live, what they eat, what they wear, how they move, how they heal themselves, how they educate themselves, and how they entertain themselves.
When consumers change their behavior, the first signs can be seen in one of these seven industries, and it quickly multiplies.
Kost: What lessons do you hope executives will take from your book?
Teixeira: That the game has changed. In the past, there were a few big companies competing with each other. Coke versus Pepsi. Airbus versus Boeing. GE and Siemens. Now there are thousands of startups in any market, and they're competing with the big companies without having the resources.
But in most cases, consumers are disrupting markets, not startups and not technology. Your way out as a business executive requires adapting and evolving your business model.
Danielle Kost is senior editor of Harvard Business School Working Knowledge.
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Book Excerpt
Layers of Innovation
From: Unlocking the Customer Value Chain
By Thales S. Teixeira
As an advisor to incumbents and startups, I’ve had a chance to watch many entrepreneurs in action and to follow their thinking as it has evolved. Some entrepreneurs conceptualize their new business model all at once, in a single, grand epiphany. They proceed intuitively, rather than methodically.
Twitch’s founders are a good example. They began with a single, “big” idea—allowing people to live-cast on the internet their day-to-day activities—that was centered on technology. After many twists and turns, they arrived at their eventual business model of allowing gamers to decouple playing games from the activity of viewing top players playing them.
Other entrepreneurs are more deliberate than this, beginning by analyzing the existing model in their industry and then layering their own innovation on top. But they still proceed largely by feeling their way, reacting opportunistically to circumstances as they arise.
What if entrepreneurs could proceed far more methodically? What might that look like? In my years of working with entrepreneurs who are building businesses from scratch, and executives rebuilding existing businesses, I’ve developed a way of thinking that is more deliberate, and hence replicable. I typically recommend that entrepreneurs or executives embrace the customer’s vantage point and organize their thinking in terms of three layers.
The first layer is to articulate the current or standard business model. After all, most startups need to pull customers away from existing businesses or activities (e.g., dry cleaning versus do-it-yourself clothes washing). Customers evaluate the startup in comparison to what they already have. If you want to thoroughly understand a new business idea, you must take the current reality as your foundation.
The second layer is to develop the digital equivalent of the standard model. Almost all young entrepreneurs I meet today incorporate the internet into their business ideas. When comparing their innovative products to the best options that are currently available, the less elaborate ideas tend to focus on simply translating or “porting” a traditional business model onto the internet.
As an example, homeowners traditionally hire housekeepers, gardeners, and others to help with common household chores. TaskRabbit, the digital equivalent, lets you hire people, but do so over the web. Likewise, the startup company Washio created a mobile app that allowed you to request digitally that your dry cleaning be picked up and delivered, saving you the trouble of going to the dry cleaner’s yourself.
With this digital equivalent layered on top of the standard business model, the third and final layer for entrepreneurs and executives is to determine how to innovate on top of digital business models.
Some entrepreneurs I’ve met understand that the mere porting of a business model online isn’t enough. It might benefit users, but it creates downsides, too.
TaskRabbit accelerates the process of choosing people to perform chores for you, but it’s also riskier, since it requires that you allow complete strangers inside your home. Washio offered convenience, but at a price.
Considering the benefits and costs, smart entrepreneurs try to layer on top of their digital business idea an innovation that transcends mere digitization, and that produces a functional benefit for customers.
Founders of Hello Alfred innovated upon the TaskRabbit model by outsourcing the management of TaskRabbit workers to personally assigned butlers, or “Al- freds.” For users, the presence of a butler on the scene allowed for a more trustworthy and reliable service.
Many of the entrepreneurs I’ve worked with find that this three-part structure allows them to distinguish clearly between the novel and non-novel aspects of their business idea. It also forces the more intuitive thinkers to articulate, test, and validate their assumptions, rather than to just plop an idea out on the table and have others react to it.
Finally, the format clarifies for all interested parties—including advisors, investors, and employees—the incremental value of the proposed business idea relative to the traditional approach.
Further, it reveals the hidden assumptions, as well as the incremental value, of any innovative technologies and business model components being proposed.