Bundling is a business process where a series of blocks in a value chain are grouped to lock in consumers as the bundler takes advantage of its distribution network to limit competition and gain market shares in adjacent markets. This is a distribution-driven strategy where incumbents take advantage of their leading position.
Bundling vs. Unbundling
Usually, when a company has gained monopoly power, it will use bundling to make consumers get its whole set of products and lock them by leveraging its existing distribution networks (Microsoft Windows is an example).
Unbundling, instead, is a business process where a series of products or blocks inside a value chain is broken down to provide better value by removing the parts of the value chain that are less valuable to consumers and keeping those that, in a period in time, consumers value the most.
Bundling is very common in the business world in industries that tend to mature and become more and more competitive.
That happens because as startups enter new spaces, and those new spaces become viable and quite large, incumbents leverage their distribution power to quickly build an alternative to the new entrance while bundling it up with its other services.
Take the example of Microsoft, which tried to enter the Browser market quickly by launching its Internet Explorer browser within Windows.
This highly reduced the friction for the browser adoption, and it enabled Microsoft’s Internet Explorer to quickly gain traction against the most popular browser at the time, Netscape.
Of course, in this case, when bundling is aggressively executed by the incumbent might quickly turn into an abuse of dominating position.
It helps increase the perceived value of the company’s brands for their existing customers
For instance, going back to the case of Microsoft incorporating Internet Explorer, for free, into its Windows package, it enabled its existing users to have an additional service for free and with much-reduced friction.
At the time, using an Internet Browser was still quite complex.
It helps expand the customer base
As Microsoft introduced Internet Explorer, it automatically opened up the way to develop new products for a new and expanding customer base.
Microsoft Office Case Study
As Microsoft became a tech giant throughout the PC era, it built a strong distribution network to lock in consumers in the PC market for decades.
Indeed, Microsoft bundled its Windows in computers before they got purchased.
Thus, encouraging manufacturers to push Microsoft’s products.
If abused by a monopolist, a business model primarily built on bundling can turn into anti-competitive behaviors.
Microsoft’s Teams Case Study
As Microsoft saw the rise of Slack disrupting the productivity space, it quickly acted to create its own version, as a knockoff of Slack called Teams.
This worried Slack so much that the company bought an entire page in The NY Times to write an open letter to Microsoft’s bundling Teams, as am abuse of its position.
Source: @stewart Twitter
It was November 2016, and Slack was correct, Microsoft would soon make its Teams very successful, thanks to its distribution power.
This is a perfect example of how powerful bundling can be when combined with a dominant position and massive distribution.
This sort of move is risky as it might awaken the regulator.
However, if you’re Microsoft, you might accept the cost that comes later (a significant fine) as the cost of doing business, yet stay relevant in a quickly evolving market.
And with productivity representing the core of Microsoft’s business model for decades, the company understood that either it was going to defend its core or it was going to lose an important chunk of its business.
Slack merging with Salesforce
Since regulators did not intervene in Microsoft’s bunding of Teams, Slack was either going to fight a very fierce battle, or it needed to understand how to compete against Microsoft’s massive distribution power.
Salesforce left Slack to operate independently while it smoothly integrated it into its offering to expand the value of its CRM.
Thus, by joining Salesforce, Slack could compete against Microsoft’s massive distribution power.
This is a perfect example of how powerful bundling can be and how it can shape a whole industry to consolidate as the stronger players roll out their bundling strategy.
Was Netflix disrupting Disney?
Another interesting case is the opposite of Microsoft vs. Slack, where Slack has been pushed into the corner and had to sell to Salesforce.
Let’s take the case of Netflix, which has been disrupting Disney for years until…
Disney bundling up its streaming empire
By September 2022, Disney counted 235,7 million subscribers, whereas Netflix counted 223 million subscribers.
By 2022, Disney’s bundle of streaming services (comprising Disney+, ESPN, and Hulu) passed Netflix’s subscriber count!
Disney+ only started to build its streaming services in 2019, yet by 2022, it became a powerhouse.
Of course, Disney threw a considerable amount of resources into it by launching its Disney+ service, and by purchasing Hulu.
By September 2022, Disney counted 235,7 million subscribers, whereas Netflix counted 223 million subscribers.
Yet, this helped Disney reverse the disruption from Netflix, which by 2022 faced a substantial threat from Disney, as the company used its distribution power to bundle up its streaming services to create a compelling offering on the market.
In this scenario, Disney stopped Netflix’s dominance successfully by using a powerful bundling strategy.
Unbundling
Unbundling is a business process where a series of products or blocks inside a value chain is broken down to provide better value by removing the parts of the value chain that are less valuable to consumers and keeping those that, in a period in time, consumers value the most.
Usually, in business, depending on the context, companies might gain a competitive advantage by either bundling or unbundling some of the activities within a value chain.
Usually, when a company has gained monopoly power, it will use bundling to make consumers get its whole set of products and lock them by levering on its existing distribution networks (see Microsoft Windows).
Unbundling is the opposite process when a newcomer enters a traditional and established industry by removing the parts of the value chain less valuable to consumers and only capturing the most valuable part (think of how Amazon unbundled retail stores by designing in a whole new experience, that leveraged on digital real estates).
When entering the market as a startup, you can use different approaches. Some of them can be based on product, distribution, or value. A product approach takes existing alternatives and 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.
The digital era has brought several business waves that led to the creation of new industries and companies, once newcomers, then become giants themselves.
Let’s look at some of those trends that shaped and shaped the business world in the web era.
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.
Where Unbundling looks at the product offering to break down what’s most valuable and offer it more conveniently.
Disintermediation looks primarily at distribution to understand what actors can be driven off the market, as they primarily work as fragmented intermediaries.
The classic example is how platform business models have been disintermediating several industries.
As they did so, former intermediaries were wiped out, and the whole market grew.
Yet, this process often leads to the consolidation of a new ecosystem created by the super-platform.
As this ecosystem adapts to the new rules and policies created by the super-platform (implicit or explicit).
The ecosystem adapts to it, and the new intermediaries that enhance that ecosystem spring up.
For instance, as Amazon is disintermediating the delivery industry with last-mile delivery, that might create a situation where key players that have existed for decades (FedEx, DHL) might be kicked out of the marketplace or perhaps just remain niche players with marginal market shares.
That might happen as Amazon might create a much larger industry, driven by its last-mile delivery ecosystem that might favor the birth of new intermediaries aligned with Amazon’s last-mile delivery policies.
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.
This process of reintermediation will help industries and markets to be born on top of new ecosystems made of incentives and disincentives.
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.
In a decoupling process, the decoupler takes the most valuable part of the customer value chain and offers it to customers.
That is how it gains traction.
Coupling
As startups gain control of new markets. They expand in adjacent areas in disparate and different industries by coupling the new activities to benefit customers. Thus, even though the adjunct activities might seem far from the core business model, they are tied to the way customers experience the whole business model.
In a coupling process, instead, the coupler expands in new areas and activities that might seem disconnected from the overall business model, and yet, the way those activities are offered to final customers also enhances the whole business model.
Business modelinnovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
