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 are broken down to provide better value by removing the parts of the value chain that are less valuable to consumers and keep 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 levering on their 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 capture 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 such 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 behaviors.

Google Chrome on Android Devices

One of the most successful Google’s acquisition 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.

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 is deteriorating Microsoft is quickly losing its bundling power with the Windows products.

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

Bundling can last decades depending on how long a specific technology is popular, and for 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 able to come in, 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 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 part 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 took over an industry that becomes mature, eventually the company that once leveraged on unbundling to take over an industry, it will become the one who bundles to leverage on 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 driven by the web era

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 to several business waves, that led to the creation of new industries and companies, once newcomer, then become giants themselves.

Let’s look at some of those trends that were 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, 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 favour the birth of new intermediaries, that are aligned with the Amazon last-mile delivery policies.

Reintermediation

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

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 to the overall business model, and yet, the way those activities are offered to final customers, also enhance the whole business model.

Other business concepts:

Connected Business Frameworks

AI Supply Chains

data-supply-chain
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distributed to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.

Bullwhip Effect

bullwhip-effect
The bullwhip effect describes the increasing fluctuations in inventory in response to changing consumer demand as one moves up the supply chain. Observing, analyzing, and understanding how the bullwhip effect influences the whole supply chain can unlock important insights into various parts of it.

Supply Chain

supply-chain
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.

Data Supply Chains

data-supply-chain
In a data supply chain the closer the data to the customer the more we’re moving downstream. For instance, when Google produced its own physical devices. While it moved upstream the physical supply chain (it became a manufacturer) it moved downstream the data supply chain as it got closer to consumers using those devices, so it could gather data directly from the market, without intermediaries.

Last Mile Delivery

last-mile-delivery
Last-mile delivery consists of the set of activities in a supply chain that will bring the service and product to the final customer. The name “last mile” derives from the fact that indeed this usually refers to the final part of the supply chain journey, and yet this is extremely important, as it’s the most exposed, consumer-facing part.

Backward Chaining

backward-chaining
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.

Revenue Modeling

revenue-model-patterns
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.

Pricing Strategies

pricing-strategies
A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.

Dynamic Pricing

static-vs-dynamic-pricing

Price Sensitivity

price-sensitivity
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Price Ceiling

price-ceiling
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors. 

Price Elasticity

price-elasticity
Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It can be described as elastic, where consumers are responsive to price changes, or inelastic, where consumers are less responsive to price changes. Price elasticity, therefore, is a measure of how consumers react to the price of products and services.

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

network-effects
network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 
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