Business Model Generation

UnBundling Business Models

Def_Pattern No. 1

The concept of the “unbundled” corporation holds that there are three fundamentally different types of businesses: Customer Relationship businesses, product innovation businesses, and infrastructure businesses. • Each type has different economic, competitive, and cultural imperatives. • The three types may co-exist within a single corporation, but ideally they are “unbundled” into separate entities in order to avoid conflicts or undesirable trade-offs.

[ REF·ER·ENCES ]

1 • “Unbundling the Corporation.” Harvard Business Review. Hagel, John, Singer, Marc. March– April 1999.

2 • The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market. Treacy, Michael, Wiersema, Fred. 1995.

[ EX·AM·PLES ]

mobile telecom industry, private banking industry

1 John Hagel and Marc Singer, who coined the term “unbundled corporation,” believe that companies are composed of three very different types of businesses with different economic, competitive, and cultural imperatives: Customer Relationship businesses, product innovation businesses, and infrastructure businesses. Similarly, Treacy and Wiersema suggest that companies should focus on one of three value disciplines: operational excellence, product leadership, or customer intimacy.

2 Hagel and Singer describe the role of Customer Relationship businesses as finding and acquiring customers and building relationships with them. Similarly, the role of product innovation businesses is to develop new and attractive products and services, while the role of infrastructure businesses is to build and manage platforms for high volume, repetitive tasks. Hagel and Singer argue that companies should separate these businesses and focus on only one of the three internally. Because each type of business is driven by different factors, they can conflict with each other or produce undesirable trade-offs within the same organization.

3 On the following pages we show how the idea of unbundling applies to business models. In the first example, we describe the conflicts and undesirable trade-offs created by a “bundled” business model within the private banking industry. In the second example we show how mobile telecom operators are unbundling and focusing on new core businesses.

Private Banking: Three Businesses in One

Swiss private banking, the business of providing banking services to the very wealthy, was long known as a sleepy, conservative industry. Yet over the last decade the face of the Swiss private banking industry changed considerably. Traditionally, private banking institutions were vertically integrated and performed tasks ranging from wealth management to brokerage to financial product design. There were sound reasons for this tight vertical integration. Outsourcing was costly, and private banks preferred keeping everything in-house due to secrecy and confidentiality concerns.

But the environment changed. Secrecy became less of an issue with the demise of the mystique surrounding Swiss banking practices, and outsourcing became attractive with the breakup of the banking value chain due to the emergence of specialty service providers such as transaction banks and financial product boutiques. The former focus exclusively on handling banking transactions, while the latter concentrate solely on designing new financial products.

Zurich-based private banking institution Maerki Baumann is an example of a bank that has unbundled its business model. It spun off its transaction-oriented platform business into a separate entity called Incore Bank, which offers banking services to other banks and securities dealers. Maerki Baumann now focuses solely on building Customer Relationships and advising clients.

On the other hand, Geneva-based Pictet, the largest Swiss private bank, has preferred to remain integrated. This 200-year-old institution develops deep Customer Relationships, handles many client transactions, and designs its own financial products. Though the bank has been successful with this model, it has to carefully manage trade-offs between three fundamentally different types of businesses.

Trade Offs

1 The bank serves two different markets with very different dynamics. Advising the wealthy is a long-term, relationship-based business. Selling financial products to private banks is a dynamic, fast-changing business.

2 The bank aims to sell its products to competing banks in order to increase revenues—but this creates a conflict of interest.

3 The bank’s product division pressures advisors to sell the bank’s own products to clients. This conflicts with client interest in neutral advice. Clients want to invest in the best products on the market, regardless of origin.

4 The cost- and efficiency-focused transaction platform business conflicts with the remuneration-intensive advisory and financial products business, which needs to attract costly talent.

5 The transaction platform business requires scale to drive down costs, which is difficult to achieve within a single bank.

6 The product innovation business is driven by speed and quick market entry, which is at odds with the long-term business of advising the wealthy.

The figure above depicts the traditional private banking model, describes trade-offs, and unbundles it into three basic businesses: relationship management, product innovation, and infrastructure management.

Unbundling the Mobile Telco

Mobile telecommunication firms have started unbundling their businesses. Traditionally they competed on network quality, but now they are striking network sharing deals with competitors or outsourcing network operations altogether to equipment manufacturers. Why? Because they realize that their key asset is no longer the network—it is their brand and their Customer Relationships.

Equipment Manufacturers

Telcos such as France Telecom, KPN, and Vodafone have outsourced operation and maintenance of some of their networks to equipment manufacturers such as Nokia Siemens Networks, Alcatel-Lucent, and Ericsson. Equipment manufacturers can run the networks at lower cost because they service several telcos at a time and thus benefit from economies of scale.

Unbundled Telco

After unbundling its infrastructure business, a telco can sharpen its focus on branding and segmenting customers and services. Customer relationships comprise its key asset and its core business. By concentrating on customers and increasing share of wallet with current subscribers, it can leverage investments made over the years acquiring and retaining customers. One of the first mobile telcos to pursue strategic unbundling was Bharti Airtel, now one of India’s leading telcos. It outsourced network operations to Ericsson and Nokia Siemens Networks and IT infrastructure to IBM, allowing the company to focus on its core competency: building Customer Relationships.

Content Providers

For product and service innovation, the unbundled telco can turn to smaller, creative firms. Innovation requires creative talent, which smaller and more dynamic organizations typically do a better job of attracting. Telcos work with multiple third-parties that assure a constant supply of new technologies, services, and media content such as mapping, games, video, and music. Two examples are Mobilizy of Austria and Sweden’s tat. Mobilizy focuses on location-based service solutions for smartphones (it developed a popular mobile travel guide), and tat concentrates on creating advanced mobile user interfaces.

Unbundled Patterns x3

KP Product and service innovation, infrastructure acquired from third parties

KR key assets and resources are the customer base and subscriber trust acquired over time

C$ Customer acquisition and retention comprise main costs, which include branding and marketing expenses

R$ This model aims at generating revenues with a broad scope of products built upon customer trust—the goal is to win a large “share of wallet”

Everything in this model is tailored to understanding and serving customers, or building strong Customer Relationships

KA & VP activity is focused on leveraging research and development to bring new products and services to market

CS Products and services can be brought to market directly, but are usually delivered through B2B intermediaries focused on customer relationships

KR & C$ High cost base due to the battle over creative talent, the key resource in this model

R$ High premium chargeable because of novelty factor

KA The activities and offer are focused on delivering infrastructure services

CS Services are usually delivered to business customers

C$ Platform is characterized by high fixed costs, which are leveraged through scale and large volume

R$...