unbundling

What Is Unbundling And Why It Matters In Business

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.

What does unbundling mean in business?

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 leveraging its existing distribution networks (Microsoft Windows is an example).

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 monetizable and highly valued part (think of how Amazon unbundled retail stores).

What are some examples of bundling?

bundling
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.

Some examples of bundling comprise:

Microsoft Windows on PCs

As Microsoft became a tech giant throughout the PC era, it managed to build a strong distribution network to be able 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.

Bundling, if abused by a monopolist, can turn into anti-competitive behavior.

Google Chrome on Android Devices

One of the most successful Google acquisitions has been Android, which enabled the company to stay on top of the game throughout the mobile devices era.

In this context, some Google products (such as Google Chrome) are bundled by default within hardware Andoird devices.

This enables Google to keep also a competitive advantage in its core business model, as the company can capture the whole data pipeline.

OpenAI Unbundling Google?

In recent years, AI has incredibly evolved to the point of becoming able to provide precise answers at scale.

In short, for years, Google has been tweaking its algorithms at scale to give users direct answers to their questions.

This led to the explosion of websites like Quora, and Google itself evolved to enable more direct answers with featured snippets.

However, with the incredible evolution of language and generative models, now we’re living in a scenario where machines exist.

Take this example from ChatGPT, where I jokingly asked the machine to explain whether it would compete with Google, and that’s what it said.

Of course, there is no intention or conscious understanding behind it.

But the interesting part is that this scenario might now be that far-fetched.

When does bundling lose its impact?

When a technological wave loses traction, bundling becomes ineffective.

Indeed, when a new technological wave comes in, products that before dominated it become obsolete, thus opening the space for new companies to take over the distribution pipelines.

For example, as the PC era deteriorates, Microsoft is quickly losing its bundling power with Windows products.

Another example is how the Google business model will lose its bundling power when the mobile era ends.

Bundling can last decades depending on how long a specific technology is popular and how long a company can keep its dominant position.

What are some examples of unbundling?

Unbundling becomes extremely appealing when a whole industry has been built on the building logic.

Therefore, the player can identify the most valuable part of the value chain for the consumer and offer it at a more convenient price (thus breaking the trade-off between value and cost at the core of a blue ocean strategy).

Unbundling becomes a powerful force.

blue-ocean-strategy
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

Apple’s iTunes unbundled albums

When Apple introduced iTunes, it unbundled the CDs and albums.

You no longer needed to buy an entire CD to listen to the single song you wanted.

Therefore Apple’s iTunes unbundled CDs by offering single songs at 99 cents.

Amazon’s e-commerce unbundled retail

When Amazon enabled consumers to buy at a convenient price and selection on its platform, it started to unbundle retail.

In short, on Amazon, you could pick only what you wanted the most by navigating through several online stores at once.

This process is still ongoing and a powerful force.

Google unbundled newspapers

When Google indexed the whole web, it enabled readers to pick articles from several websites without having to go through parts of them that they might have found less interesting (classified ads, job boards, and so on).

Therefore, in a way, Google worked as an unbundling force toward the publishing industry.

When does unbundling make more sense?

If you are a newcomer in an industry where unbundling can guarantee strong growth, that can serve as a competitive advantage.

As existing players that control the market might be too slow, ineffective, and in a conflict of interest with their own consumers, the unbundled has a great opportunity to take over.

Bunding and unbundling in continuous conflict and balance

It’s interesting to notice how bundling and unbundling might be tied to how companies evolve.

When a company eventually takes over an industry that becomes mature, the company that once leveraged on unbundling to take over an industry will become the one who bundles to leverage its distribution network.

At that stage, newcomers surfing the wave of an emerging and fast-growing industry can use unbundling as a core business strategy.

Other waves and macro-trends

entry-strategies-startups
When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution or value. A product approach, takes existing alternatives and it 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
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, 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 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
Reintermediation consists of 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

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 it offers it to customers.

That is how it gains traction.

Coupling

coupling
As startups gain control of new markets. They expand in adjacent areas in disparate and different industries by coupling the new activities to benefits customers. Thus, even though the adjunct activities might see 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.

Read Next: Business Model Innovation, Business Models.

Related Innovation Frameworks

Business Engineering

business-engineering-manifesto

Business Model Innovation

business-model-innovation
Business model innovation 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.

Innovation Theory

innovation-theory
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.

Types of Innovation

types-of-innovation
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).

Continuous Innovation

continuous-innovation
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

disruptive-innovation
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.

Business Competition

business-competition
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

technological-modeling
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.

Diffusion of Innovation

diffusion-of-innovation
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.

Frugal Innovation

frugal-innovation
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.

Constructive Disruption

constructive-disruption
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.

Growth Matrix

growth-strategies
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).

Innovation Funnel

innovation-funnel
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.

Idea Generation

idea-generation

Design Thinking

design-thinking
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.

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