The Cycle of Bundling And Unbundling in Business Strategy

The Cycle of Bundling And Unbundling in Business Strategy

Disruption takes place when there is a new breakthrough solution, for an existing industry problem, or when the existing problem is redefined and solved. Whenever this happens, existing industries are re-created and their boundaries are reconstructed. Non-customers are converted into customers. Growth trajectory of the industry, zooms into a new phase. This is usually the resultant effect of the convergence of multiple technologies and mass market adoption. 

During the events leading to the Initial Public Offering of Netscape, its CEO, Jim Barksdale quickly noted, “There are only two ways to make money in business: one is to bundle; the other is unbundle.”  However, the capacity to do either of the two depends on the available technology and how such technology can be harnessed to deliver superior results. There are moments when bundling is important to the distribution and economics of scale/scope, just as there are times unbundling is essential to add more flexibility and personalization to consumer experience.  

It has been observed that there is a maxim that drives the back-and-forth pattern, commonly seen in business frameworks. It is that most business strategies have a complementary nature (direct vs. indirect, vertical vs. horizontal, quantitative vs. qualitative, premium vs. low price, hack vs. plan, unbundle v. bundle, fixed payment v. subscription, etc.). In some cases, they may overlap. These back and forth movement, do not just occur at will; they are moments that unleash substantial leapfrog in consumers’ benefits. Organizations, for instance, switch between bundling their products and services or breaking them down for a la carte purchases, as a drive to satisfy customers better. 

First Wave of Unbundling

Back to the 1800’s, the transportation infrastructure in the United States grew massively with the constructions of roads, canals, turnpikes, and railroads. This led to the fall in the time and costs requirements, to move from point A to B. The transportation revolution further made it possible for the first great unbundling to take place, namely the end of the necessity of making goods in proximity to the point of consumption. Agricultural and manufactured goods can now be shipped across towns and cities, thus opening new market opportunities. This reduced the number of manufacturing plants needed to be set up, making economics of scale easier to achieve, and increasing abundance of access. 

Improvement in transport systems, made it possible for changes to be made to the relationship between space and time.  The more efficient the transport system, the larger the distance, that can be covered within the same amount of time. The result is a space / time convergence, because the amount of space that can be overcome for a similar amount of time increases considerably. 

Source: Transport Geography

Second Wave of Unbundling

The economics of scale achieved as a result of falling transportation costs, further led to another bundling, vertically integrated companies. These companies attempt to own much of their supply chain, in order to gain maximum efficiency through economies of scale. For instance, in the first half of 1900s, Ford Motors owned much of its supply chain, from the iron mines, to the steel mills, plants (for manufacturing of component car parts), forests and sawmill (for wooden parts), and assembly plants (to churn out finished cars).  No doubt, this was a profitable way of doing business in the then predictable market. But as markets expanded, and customers’ preferences changed, the all-inclusive model began to break down, as it focused more on efficiency, at the expense of responsiveness to customer desires. 

Advances in information technology, and falling costs of communication and coordination, made it possible for the second great unbundling to take place, the end of the need for supply chain activities, to take place near each other. Thus, vertical integration gave way to virtual integration, giving companies the ability to focus on their core competence, and outsource other operations, in order to keep up with continuing changes in technology and customers’ demands. 

Third Wave of Unbundling

As the components of the supply chain matured, it led to the gatekeeping of customers, by middlemen, another form of bundling.  This spiralled into inflexibility, supply monopolization and poor customer experience. The coming of the digital age, brought along with it, unprecedented ability to disarm the gatekeepers, with digital business models, cutting out middlemen and blurring supply chains. When new technology or process, reduces manufacturing and distribution costs, the original motivation for bundling disparate product/service value is eliminated. New entrants take advantage of these technologies to offer individual components, with higher value, speed and personalization, than the limited offering in the bundle. 

Case Study: Music Industry

Consider the music industry, where the high manufacturing, storage, distribution and marketing costs for labels drove the bundling of songs into albums to increase distribution efficiencies and overall market revenue. In the early 2000s, digitalization, with a near-zero distribution and consumption cost, eliminated the economic rationale for bundling songs. It enabled the stripping of a single song from the album and offering it as an affordable stand-alone product, instead of requiring the consumer to purchase the full CD with extraneous content. As customers experienced more choices, they became less willing to pay for bundles, thus leading to the disruption of brick-and mortar incumbents. iTunes and other digital distributors, rode the wave of unbundling to displace independent music stores, which could not profitably offer singles. 

While this disruption took place, there was a redesign in the music industry, shifting focus from physical products to digital distribution and life events, such as concerts. This magically increased the value of music talents. They can be everywhere digitally, but can only be in one location physically. Because of the internet, a musician can have millions of fans online, as a result of lower distribution cost. This large fan base, in turn increases the intrinsic value of the musician significantly, at life events. 

No doubt, unbundling has positive effects, giving consumers unprecedented choice and control. However, it can also create a mass of different services that may be hard to coordinate. Fortunately for the music industry, the ubiquitous internet connectivity that accompanied the mobile era, made music streaming very popular. Now, streaming services like Spotify and Apple Music, offer subscribers, on-demand access to a bundle of almost all music for less than the cost of one album per month. The digital bundling of music again, transformed the music business from an unstable revenue model, to a more stable one. All together, we can see a paradigm shift in the music industry, from bundling (physical albums) to unbundling (single downloads) and back to bundling (streaming services). 

Similar examples have been observed across many domains; information, video, banking, mobile device, etc. This is because digitalization makes it easier to bundle or unbundle digital products and services, than physical ones. Bundling and unbundling is an intrinsic cycle. Bundling creates the incentives for unbundling and vice versa. 

Knowing when to bundle or unbundle however, depends on the kind of industry you belong and the type of products and services you are offering. You need to consider various factors? What are your market projections? What insights can you draw from your personal and industry sales record? What is the current economic landscape that can influence your choice? What are the components of your products/services? Does your product have multiple capabilities, with uneven usage? Will it capture more or less value when you bundle it with other offerings or when you offer it as a stand-alone product?  How will it affect your pricing and in turn influence the decisions of your customers?  Are the needs of your customers unique or different?

In all, both product bundling and unbundling are effective, beneficial and useful in their respective ways. However, at any point in the trajectory of an industry, one is more attractive than the other. When you combine the right choice with a good execution, you can set a new basis of competition in your industry. 

 

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