If you want to understand business innovation’s cutting-edge approach, the online watch retailer Watch Outfitters, founded by 17-year-old Jonah Saya, is a good place to start.
On the surface, it seems like just another online retailer. Probe deeper, though, and you notice an interesting distinction. Saya doesn’t make or sell the watches—a Chinese manufacturer does. He doesn’t ship any orders—a U.S.-based distributor does. He doesn’t take payments—Square and PayPal do. He didn’t even create the website or take the pictures of the products. What Saya solely does is generate traffic by using Facebook.
Watch Outfitters is one of a new breed of startups with one defining trait: breaking, or decoupling, the links in the “customer value chain.” These disruptors focus on offering customers one or a couple of activities (trialing products, comparing them, selecting them, shipping them, consuming them, disposing of them, and so on), leaving it to established businesses to fulfill the rest. Airbnb, Pandora, Spotify and Uber are high-profile examples of this trend.
Now decoupling is advancing into new markets like health care, education, agriculture and industrial firms. Among the established companies most at risk are UnitedHealth UNH, -0.75% and CVS Health CVS, -2.43% Laureate Education LAUR, -2.05% and Graham Holdings GHC, -0.91% DowDuPont DWDP, -0.76% and Caterpillar CAT, +0.72% and General Electric GE, -1.29% and Honeywell HON, -0.03%
Take health care. EverlyWell allows patients to order a kit online and use it to send back a sample of saliva, urine, or blood that is resent to traditional labs for analysis. The company offers more than 35 tests, from fertility to cholesterol. Consumer don’t leave home to do exams. This is potentially very disruptive to UnitedHealth’s business model reliant on costly physical locations.
PillPack organized and delivered the multiple pills that people needed to take during the day, but it didn’t sell these medications—pharmacies did. Amazon.com AMZN, -0.14% bought it, and now the “everything store” is moving into CVS’s turf in a big way.
In agriculture, Farmer’s Business Network collects data on crop yield from various farmers in a region and helps them decide what seed type is best for their farms, bypassing the salespeople of DowDuPont and Caterpillar. Similarly, decouplers using online education platforms and 3-D printing are aiming their crosshairs on the established players in educational and industrial Fortune 500 companies, respectively.
Decoupling gone wrong
Of course, decoupling alone is no guarantee of market success.
When decouplers haven’t succeeded, it’s in large part because they’ve failed to improve the activities they steal. Instead of focusing on one activity and doing it better, the juice startup Juicero tried to improve the entire process of consuming natural fruit juice. It inserted itself into production, connecting with fruit growers and building juice processing facilities. It also created, packaged and delivered juice packages in addition to selling a $700 juice dispenser (later reduced to $400) to squeeze juice packages into a cup.
From the consumer’s standpoint, Juicero did make consuming juice slightly easier by shipping packages to consumers’ homes and saving them the trouble of squeezing juice by hand, but the juice dispenser’s costliness offset that benefit. Unimpressed by the overall offering, consumers stayed away from Juicero, and the company closed after four years.
Another startup, Shyp, picked up, packaged, and delivered items that incumbents like FedEx and UPS shipped, decoupling these activities from the actual shipping of packages. Many people find it bothersome to pack and deliver small parcels to the post office, but they wouldn’t pay more than a few dollars for someone to do this for them. For Shyp to survive, it had to offer dirt-cheap rates, but it couldn’t do so unless it operated efficiently and at scale. In 2018, after a failed early expansion, Shyp went out of business.
Currency
Getting decoupling right
Investors in Juicero and Shyp got badly burned. How can you know if investing in a decouplers is wise? My research reveals four questions that investors should ask:
• Do they deliver more for less? Successful decouplers deliver a better product or service for their chosen activity. “Better” often means cheaper, faster or less effort. Trov, an app-based insurance startup, allows people to insure their possessions one item at a time by turning insurance on and off with the swipe of a finger on demand. That’s clearly an improvement over the traditional process.
• Do they attend to the cumulative benefit? To avoid Juicero’s fate, ensure that improvements in one dimension of quality don’t offset deficits in another. An activity that is easier or faster might not benefit consumers overall if it’s not cheaper. One reason ride-hailing startups like Uber and Lyft are so popular is that they don’t require any meaningful trade-offs relative to taxis.
• Can they anticipate a response? Incumbents won’t simply allow upstarts to steal customer activities from them. They’ll respond either by copying the upstart “thieves” and decoupling themselves, or by attempting to take back the activity and “recouple it.” Threatened by WhatsApp, big telecom companies opted to made talk and text free, which initially reduced much of the message service’s appeal with consumers.
• Do they understand the end game? Some decoupling businesses can sustain themselves over time as stand-alone companies, but others can’t. That’s not necessarily a bad thing. Even in cases where decouplers aren’t profitable, they can still add tremendous value to other businesses. SiriusXM paid $3.5 billion for Pandora, Amazon paid nearly $1 billion each for Pillpack and Twitch (a streaming service), and Target bought Shipt, a delivery decoupler, for $550 million.
If you are an investor in blue-chip companies, assess two risks. First, how likely are they to be in the crosshairs of disruptive startups aiming to steal their customers? And second, how effective can they respond to this new wave of digital disruption?
Remember that size, market dominance and financial resources are not enough to fend off digital disruptors. They didn’t save Borders, Circuit City, Kodak or Nokia from extinction. Decoupling might topple more.
Thales Teixeira is a professor at the Harvard Business School and the author of “Unlocking the Customer Value Chain.”
