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.
Aspect
Explanation
Definition
Unbundling refers to the process of breaking down a bundled product or service into its individual components or features and offering them separately. This strategy allows customers to pick and choose only the specific elements they need, resulting in a more tailored and cost-effective solution. Unbundling is often seen in various industries, including technology, media, and finance.
Key Concepts
Bundled Product: A product or service that combines multiple features or components into a single offering. Unbundling: The act of separating these features for individual sale or consumption. Customer Choice: Unbundling gives customers the flexibility to select only what they require, reducing unnecessary expenses. Customization: Unbundling allows for greater customization as customers can assemble their preferred combination of features.
Industries and Examples
Unbundling can be observed in multiple sectors: 1. Media: Cable TV providers offering standalone streaming services (e.g., HBO Now). 2. Finance: Investment platforms offering commission-free trading and research tools separately. 3. Tech: Software companies providing modular subscription options (e.g., Microsoft Office 365). 4. Travel: Airlines charging for specific services like baggage and in-flight meals.
Drivers of Unbundling
Several factors contribute to the rise of unbundling: 1. Consumer Demand: Customers seek more personalized and cost-effective solutions. 2. Digital Transformation: Technology enables the easy distribution of standalone digital services. 3. Competition: New entrants often enter the market with unbundled offerings, forcing incumbents to follow suit. 4. Regulation: Changes in regulations can promote unbundling to increase competition. 5. Cost Efficiency: Companies can reduce overhead by offering only essential services.
Benefits
Unbundling offers various advantages for both businesses and consumers: 1. Cost Savings: Customers pay only for what they use, potentially reducing expenses. 2. Choice: Enhanced customization and flexibility in selecting services. 3. Competition: Promotes competition as new players enter the market. 4. Innovation: Encourages innovation as companies focus on core offerings. 5. Efficiency: Streamlines operations by eliminating unnecessary components.
Challenges
While unbundling has benefits, it also poses challenges: 1. Customer Confusion: Too many choices can overwhelm customers. 2. Pricing Complexity: Determining fair prices for individual components can be challenging. 3. Revenue Impact: Businesses may lose revenue from previously bundled offerings. 4. Integration: Customers may face difficulties integrating various standalone services.
Strategies
Companies employ various strategies for successful unbundling: 1. Pricing: Offer competitive pricing for individual components. 2. Marketing: Clearly communicate the value of each unbundled service. 3. User Experience: Ensure seamless integration and user experience. 4. Feedback: Gather customer feedback to refine offerings. 5. Innovation: Continuously innovate and add new features to standalone services.
Examples
Well-known examples of unbundling include: 1. Netflix: Transitioned from DVDs by mail to a standalone streaming service. 2. Spotify: Offers free and premium subscriptions with varying features. 3. Microsoft Office: Provides individual subscriptions for Word, Excel, and PowerPoint. 4. Airlines: Charges separately for baggage, seat selection, and in-flight services. 5. Media: News outlets offering digital subscriptions with various content access levels.
Conclusion
Unbundling is a strategic approach that aligns with the modern consumer’s desire for customization, choice, and cost savings. By carefully selecting and promoting individual components of a bundled offering, companies can better cater to their customers’ needs while remaining competitive in a rapidly changing marketplace. Unbundling is a dynamic strategy that continues to evolve across various industries.
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 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.
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
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 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 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.
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.
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.
Principles of Unbundling:
Modularization: Products or services are broken down into modular components that can function independently.
Customization: Customers have the freedom to choose specific components that align with their needs and preferences.
Pricing Flexibility: Unbundling offers different pricing options for individual components, providing cost savings for customers.
Focus on Value: Each component should provide clear value, making it attractive to customers.
Advantages of Unbundling:
Customization: Customers can tailor their experience to their specific needs, resulting in higher satisfaction.
Cost Savings: Unbundling allows customers to avoid paying for features or services they don’t require.
Market Expansion: It can attract a broader range of customers who may have varied needs and budgets.
Competitive Advantage: Unbundling can differentiate a business from competitors with fixed, bundled offerings.
Challenges of Unbundling:
Complexity: Managing and marketing a range of individual components can be complex and resource-intensive.
Cannibalization: Unbundling can cannibalize sales of bundled offerings, impacting overall revenue.
Customer Confusion: Customers may find it challenging to navigate a wide array of choices, leading to decision paralysis.
Pricing Strategy: Determining the right pricing strategy for individual components can be tricky.
When to Use Unbundling:
Customer Demand: When there is a demand for customization and flexibility among customers.
Competitive Advantage: To gain a competitive edge by offering options that competitors don’t.
Market Expansion: To tap into new market segments with varied needs and budgets.
Technology Enablement: When technology allows for efficient management of individual components.
What to Expect from Using Unbundling:
Increased Customer Satisfaction: Expect higher customer satisfaction due to tailored offerings.
Varied Revenue Streams: Unbundling can create multiple revenue streams from individual components.
Complexity Management: Be prepared to manage the complexity of offering and marketing a range of components.
Market Response: Customers may respond positively to the flexibility of choice or be overwhelmed by it.
Long-Term Impact of Unbundling:
Business Model Evolution: Unbundling can lead to a shift in the business model, focusing on modular offerings.
Customer Relationships: It can foster stronger customer relationships by meeting individual needs.
Competitive Positioning: Over time, unbundling can solidify a business’s position as a provider of choice for customized solutions.
Market Disruption: Unbundling has the potential to disrupt traditional bundled offerings in various industries.
Key highlights of bundling and unbundling in business:
Bundling:
Bundling involves grouping blocks in a value chain to lock in consumers and gain market share in adjacent markets.
Microsoft’s bundling of Windows on PCs and Google bundling Chrome on Android devices are examples of using bundling to leverage distribution networks.
Bundling can be considered anti-competitive when monopolists abuse their power.
Unbundling:
Unbundling is the opposite process, where a newcomer enters an industry by removing less valuable parts of the value chain and offering highly valued components.
Examples of unbundling include Apple’s iTunes offering single songs instead of whole albums and Amazon unbundling retail by offering a wide selection of products online.
Unbundling becomes appealing in industries built on bundling logic and can serve as a competitive advantage for newcomers.
Bundling and Unbundling in Balance:
Companies may switch between bundling and unbundling strategies based on their market position and industry maturity.
Newcomers in fast-growing industries may use unbundling to disrupt existing players, while dominant companies may use bundling to leverage their distribution networks.
Other Waves and Macro-Trends:
Disintermediation involves removing intermediaries from the supply chain to increase efficiency and transparency.
Reintermediation reintroduces intermediaries or creates new ones as markets are redefined.
Decoupling is a wave of disruption where companies break apart the customer value chain to offer valuable components separately.
Coupling involves expanding into new areas that enhance the overall customer experience and business model.
Case Studies
Software Industry:
Bundling: Microsoft Office Suite bundles together Word, Excel, PowerPoint, and more into one package.
Unbundling: Each of those software components can also be purchased individually.
Telecommunications:
Bundling: Cable companies offering packages that combine internet, cable TV, and landline phone services.
Unbundling: Choosing only a high-speed internet package without the need for cable TV or a landline.
Music Industry:
Bundling: Buying an entire album either physically or digitally.
Unbundling: Purchasing or streaming individual tracks from various artists on platforms like Spotify or Apple Music.
Airlines:
Bundling: Flight tickets that include checked baggage, in-flight meals, and seat selection.
Unbundling: Low-cost carriers offering a basic fare and charging separately for baggage, seat selection, meals, etc.
Financial Services:
Bundling: Banks offering a package that includes a checking account, savings account, and a credit card.
Unbundling: Fintech startups offering specialized services, like a savings app or a peer-to-peer payment system.
Streaming Services:
Bundling: Disney+ offering a package that includes Disney content, Hulu, and ESPN.
Unbundling: Consumers choosing to subscribe to only one specific streaming platform, such as Netflix, without additional services.
Publishing:
Bundling: Newspapers or magazines offering a subscription that includes both print and online access.
Unbundling: Offering a digital-only subscription or pay-per-article access.
Gaming:
Bundling: Gaming consoles sold with a bundle of popular games.
Unbundling: Purchasing the console and games separately.
Retail:
Bundling: Stores offering a “buy one, get one free” deal or a discounted price for buying multiple related items together.
Unbundling: Purchasing each item individually without the bundled discount.
Travel:
Bundling: Travel packages that include flights, hotel stays, and tours.
Unbundling: Booking each component of a trip separately.
Key Highlights on Bundling and Unbundling in Business:
Conceptual Understanding:
Bundling: Grouping multiple products or services to lock in consumers and gain market share.
Unbundling: Breaking down products/services to offer only the most valuable parts, often used by newcomers to disrupt established industries.
Bundling Examples:
Microsoft Windows: Pre-installed on PCs, leveraging its distribution network.
Google Chrome: Bundled by default on Android devices, ensuring dominance in the mobile browser market.
Unbundling Examples:
Apple’s iTunes: Unbundled traditional albums by offering individual songs for purchase.
Amazon: Unbundled the traditional retail experience by offering an expansive online shopping platform.
Google: Unbundled newspapers by indexing web content, allowing users to selectively engage with specific articles.
Business Dynamics:
Companies might alternate between bundling and unbundling strategies based on industry maturity and their market position.
Established companies might bundle to leverage their distribution, while newcomers might unbundle to focus on specific valuable aspects of an offering.
Broader Trends:
Disintermediation: Removing intermediaries from a supply chain to streamline and improve efficiency.
Reintermediation: Re-introducing or creating new intermediaries as markets evolve.
Decoupling: Offering a part of the value chain separately without the costs of the whole value chain.
Coupling: Expanding into new, seemingly unrelated areas that enhance the overall customer experience.
Strategic Implications:
Bundling can be perceived as anti-competitive if overused by monopolists, potentially leading to regulatory scrutiny.
Unbundling can be a powerful strategy for newcomers looking to disrupt established industries, offering them a competitive advantage.
Market Evolution:
As industries mature, dominant players often turn to bundling to capitalize on their position.
In contrast, new entrants or disruptors may employ unbundling to create differentiated value in a saturated market.
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.
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.
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