This article is an excerpt from the Shortform book guide to "Business Model Generation" by Alexander Osterwalder and Yves Pigneur. Shortform has the world's best summaries and analyses of books you should be reading.
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What is the unbundled business model? What is the benefit for a business to “unbundle” its operations?
The unbundled business model is where a business divides its operations into several categories, where each category is driven by different factors and defined by its own set of rules and operating procedures. Unbundling can be done for several reasons, but the main goal is always to improve the company’s efficiency.
In this article, we’ll look at the benefits of the unbundled business model.
What Is the Unbundled Business Model?
Companies with the unbundled business model split up their operations into three distinct business categories to increase efficiency:
Businesses Focused on Product Innovation:
- Focus: This business category aims to create the most innovative product or service on the market.
- Example: Apple is a business focused on software and hardware product innovation.
- Strategy: Businesses focused on innovation need to hire talented designers and develop efficient systems to commercialize ideas quickly.
- Resources: Successful product innovation requires investment in research, development, and talented employees.
Businesses Focused on Customer Relationship Management:
- Focus: This business category aims to nurture long-term relationships with customers.
- Example: Apple is a business focused on customer relationships—it creates excellent customer experiences to encourage brand loyalty.
- Strategy: Businesses focused on customer relationships need to look beyond the value of single transactions and focus on the lifetime value of their customers.
- Resources: In addition to tailoring products and services to satisfy customers in each customer group, businesses need to invest heavily in developing their touchpoints and customer interactions.
Businesses Focused on Infrastructure Management:
- Focus: This business category aims to operate as efficiently and as cost-effectively as possible.
- Example: Apple is a business focused on infrastructure management because it offers cloud management services.
- Strategy: Businesses focused on infrastructure management adopt strategies that minimize costs and optimize efficiency wherever possible.
- Resources: Reliable and cost-effective infrastructures depend on economies of scale and standardized processes to keep costs down.
Since each category plays a unique role and relies upon different teams and departments to operate, management experts John Hagel and Marc Singer argue that businesses that offer services in one or more of these distinct categories can’t operate efficiently unless they split (“unbundle”) these services into discrete business identities.
Further, they advise that businesses should focus only on one of these categories as their core service, and outsource the rest to specialized companies. As long as more than one of these activities coexist on a single business model, each of the elements will include conflicting priorities that will create limitations or “tradeoffs” across the business.
|Outsourcing Reduces Operating Costs|
The concept of “unbundling” directly counters traditional business philosophy, particularly regarding operating costs. Operating costs are defined by how much time, money, and effort it takes to exchange ideas, services, or assets required to operate a business. Traditionally, businesses operate on the assumption that it’s more efficient and cost-effective to manage all company processes internally, so they invest in creating various departments within their organization to manage all of their activities.
For example, you create your own marketing department, invest in hiring and training employees trained in marketing, and develop processes and systems so that this department can align with your needs as a business. You do this because you assume having your own marketing department will reduce your costs in the long term—if you outsource your marketing needs, you may have to spend additional time (send a brief or style guide, provide access to necessary materials, and resolve queries) and money to get every job done.
Business experts Hagel and Singer argue that this assumption is outdated since network developments allow specialized companies to work in sync with businesses. Further, they claim that businesses that attempt to manage all processes internally incur additional operating costs.
This is because specialized companies focus on optimizing one single activity. This single-minded focus grants them enormous advantages over businesses that need to share their resources to manage a range of activities. Specialized companies can direct all of their resources to:
1. Hire highly qualified and specialized employees
2. Gain deep industry knowledge in their specific area
3. Invest in the latest technologies
4. Develop processes so that they can easily work with other businesses
Businesses that leverage the capabilities of specialized companies gain resources without having to invest in the development, ongoing management, and integration of different departments and processes. Consequently, these businesses can focus their resources on their core activity, increase productivity, and decrease unnecessary overhead costs.
How to Leverage the 9 Elements
To avoid the conflicting priorities that limit “bundled” businesses, Osterwalder and Pigneur suggest you leverage your elements to “unbundle” as follows:
|Customer Relationship Management||Product Innovation||Infrastructure Management|
|Customer Groups||Focus on targeting specific customer groups.||Outsource customer group research and development to external partners.||Outsource to external partners—focus mainly on serving other businesses.|
|Value Offer||Value comes from offering a high quality of customer service.||Value comes from offering high-quality product and service innovations.||Value comes from providing high-quality infrastructure services.|
|Touchpoints||Create multiple touchpoints to facilitate customer interactions.||Outsource the management of touchpoints to external partners.||Outsource the management of touchpoints to external partners.|
|Interactions||Focus on acquiring customers and building strong relationships to ensure customer loyalty.||Outsource the management of customer interactions to external partners.||Outsource the management of customer interactions to external partners.|
|Profit Sources||Profit to come from long-term customer transactions—focus on their lifetime value.||Rely on high-profit margins—innovative products and services sell for higher prices.||Rely on low-profit margins—charge low prices but make profit from the high volume of sales.|
|Resources||The customer base built from developing touchpoints and interactions will eventually become a resource.||Talented and creative employees, as well as research and development facilities.||The more the infrastructure expands, the more of a resource it will become.|
|Critical Actions||Acquire customers and build trust to inspire customer loyalty.||Manage research and development facilities, and attract talented employees.||Develop and maintain the infrastructure.|
|Network||Outsource infrastructure management and product and service innovation requirements to external partners.||Outsource as much as possible so the business can focus on product and service innovation.||Outsource as much as possible so the business can focus on infrastructure management. Develop partnerships to help develop and manage the infrastructure efficiently.|
|Expenses||Invest heavily in marketing, developing touchpoints and interactions, to acquire customers.||Invest heavily in talented employees to manage the research and development processes.||High fixed costs will decrease as operations increase thanks to economies of scale.|
|Osterwalder and Pigneur refer to the recommendation from management experts that companies should narrow their business focus on delivering superior value in line with one of three value disciplines: product leadership, customer intimacy, or operational excellence. These value disciplines complement the three business categories and support the argument to “unbundle” the services. |
Interestingly, companies that focus on the same value disciplines display similarities in the way that they operate, regardless of their industry. For example, the operating structures and workplace cultures of Federal Express and Walmart are almost identical because they both pursue operational excellence.
|The Benefits of Unbundling|
In order to function efficiently, Amazon has split into multiple divisions to better serve the varying needs of the massive number of consumers and businesses it caters to: Amazon Marketplace, Amazon Prime, Amazon Web Services, Amazon Kindle, Amazon Patents, Amazon Advertising.
Each of these divisions has its own operating procedures, defined by its “value disciplines” to avoid unnecessary trade-offs or conflicts within the business as a whole. For example, Amazon Web Services provides infrastructure management and caters specifically to other businesses. Amazon needs to manage the way that it develops this service, and then acquires and interacts with these business customers in a very specific way. Since this is an entirely separate division, it has the necessary freedom to provide an efficient service and adapt to customer needs without being slowed down by the different priorities of other divisions.
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- The nine elements that make up any successful business model
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