Chapter 1
The Fast Future Arsenal: Unbundling, Rebundling and Innovating at the Intersections

Sangeet Paul Choudary

My daughter loves her Lego sets. Over the years, she's acquired a range of Lego sets - ranging from cityscapes to complex motor vehicles - and built them block-by-block as per the instructions. But once built, she promptly pulls them apart - block-by-block - and throws them in with the pile of all the Lego blocks across all the Lego sets she's ever acquired. Lego's prescribed recipe holds her interest for exactly one iteration.

Once disassembled, that growing pile of Lego blocks is where the magic lies. A wheel from a dumpster truck ends up as a roller skate for a 'Lego alien' she's been creating. A triangular wing off an airplane set ends up as a skirt pleat on a large Lego doll she's been working on. She returns to that pile every day to create assemblies limited only by her imagination.

Over the past couple of decades and more, every new generation of digital technologies has had one repeated effect on the landscape of enterprise value creation - reduction in transaction costs that emerge in inter-firm coordination.

These falling transaction costs transform the landscape of value creation into a pile of Lego blocks - building blocks of value that can be recombined into new business models. All business model innovation today follows a cycle of unbundling and rebundling, much like throwing Lego blocks into a pile and reassembling them in innovative new ways. Traditional boundaries of business model innovation no longer hold sway. Value is increasingly created at the intersection of previously unconnected domains, where you find fundamentally new ways to recombine - or 'rebundle' - these building blocks to solve problems for customers.

Business Legos - the Economics of Unbundling

Transaction costs 1,2 determine the manner in which firms organize themselves and interact with other players. To minimize transaction costs, most industrial-era firms engaged in vertical integration.3 Integration offered greater control and minimized transaction costs by absorbing all value-chain activities inside the firm.

But with the rise of digital technologies, three specific changes play out4:

• First, global connectivity - powered by smartphone penetration and social technologies - have driven the creation of a global network of connected producers and consumers of value, allowing businesses to specialize in certain activities and coordinate with other firms for other activities across the value chain.5
• Second, the adoption of the cloud enables interoperability across value chain activities.6,7 Firms increasingly specialize in a few activities and attract partnerships for complementary value creation. 'Do what you do best, partner for the rest'.
• Finally, the growth in data generation and aggregation,8 largely driven by global adoption of social technologies and sensors, coupled with improvements in machine learning and artificial intelligence (AI), enables firms to coordinate across many more partners and interfaces at scale, leveraging data to manage coordination at these interfaces. Firms can also exercise control over resources and actors without requiring explicit ownership or traditional employment relationships.9,10

As a result of these three factors, business capabilities are increasingly getting unbundled from the vertically integrated structures that dominated the industrial era. Using application programming interfaces (APIs), firms can effectively open up digital capabilities and services to external stakeholders, and plug-and-play with each other.11 Today's business operates more like a huge pile of Lego blocks. Business capabilities are modular and can plug-and-play across each other.

Consequently, this vertically integrated value chain starts to unbundle12 and new specialized firms emerge. With lower transaction costs, these firms increasingly plug-and-play across a growing landscape of unbundled specialized firms.

This also enables firms to more easily co-create value with creators of complements.13 For example, mobile applications act as complements to a smartphone's operating system, increasing the scope of the phone's functionality. Similarly, cloud-hosted software programs like Slack, the enterprise chat software, and Zoom, the video communication tool, interoperate with a wide variety of applications using APIs, thereby enabling a large scope of functionalities for consumers.

In this new landscape of value creation, unbundled firms increasingly specialize in key activities and invest in ensuring their interfaces (comprising technology, process and people) are designed towards smooth plug-and-play value creation with partners.

The Cycle of Unbundling and Rebundling

Unbundling disrupts the status quo.

Fintechs specializing in one activity unbundle the financial services value chain, healthtech firms specializing in one aspect unbundle healthcare and specialized energy startups unbundle (and, indeed, reimagine) activities of traditional utilities.

However, unbundling leads to higher coordination costs.14 Moreover, while digitization reduces many forms of transaction costs, certain transaction costs - particularly those related to ensuring safety, managing quality and enforcing property rights - increase.15

These costs are resolved through rebundling.16 Rebundling involves bundling multiple unbundled capabilities into a cohesive customer-centric offering. This is where value is recombined towards solving a customer problem.

Industrial-era firms operated within prescribed industry boundaries determined by the boundaries of the production process. Rebundling operates not around production processes but around customer value propositions. Consider the financial services industry, for instance. The industry boundaries are structured around traditional financial products. But in a connected world, an integrated customer value proposition may have to be bundled using components across multiple industry boundaries - housing, automotive, local commerce and others.

Much like the specific configuration of Lego blocks prescribed in a Lego instruction booklet, industrial-era firms embodied business models that were inelastic and unresponsive to consumer needs.

True innovation - as my daughter discovered - lies in unbundling these blocks, throwing them back into the pile, and 'rebundling' them to create entirely new creations, many of them having been created for the first time in the history of mankind (Figure 1.1).

Rebundling also enables sustainable value capture.

In the news media industry, the traditional newspaper bundle was unbundled by digital distribution on the web. Eventually, Facebook rebundled it as a news feed and arguably Google did the same through its search engine. Both 'rebundlers' then centralized advertising power and moved it away from the old bundles.

Similarly, in the music industry, file-sharing services like Kazaa and Napster unbundled the music album (the original bundle) but Spotify's playlists rebundled them and successfully captured value.

Figure 1.1 Illustrative diagram of the shift from vertical to horizontal value creation through unbundling and rebundling.

In both these examples, unbundling served to unseat incumbents but it was only through rebundling that value successfully accrued to new players.

Rethinking Value with Rebundling

As new digital technologies increasingly unbundle value chains, rebundling holds the key for the Fast Future Executive. Unbundled services won't sustain unless they serve as beachheads to attract customer engagement and then leverage that customer chokepoint to rebundle services around key consumer needs.

Consider Square, which started with a smartphone-based point-of-sale terminal for merchants on the move. Using this beachhead, it has expanded to an end-to-end financial services bundle centred around the merchant, spanning financing, payroll, payments and more.

Typically, rebundling follows three key steps centred on consumer needs.

First, the firm uses an unbundled service to gain primacy of consumer relationship.

Square started out by offering a dongle attached to a phone, allowing you to swipe a credit card and process payments. This dongle converted the phone into a mobile point-of-sale (POS) terminal, allowing service providers providing home delivery and off-location services to accept card payments using their phone.

Second, the firm leverages this customer relationship to capture data and construct superior personalization and user reputation models.

Square's dongle allowed it to capture a unique form of data - payments data for transactions that had previously been carried out in cash. Capturing money-in, money-out data allowed Square to start building credit scores for this group of merchants, thus far underserved by traditional banking.

Finally, using these superior data models and leveraging its primacy of customer relationship, the firm rebundles other services around the consumer.

Today, Square rebundles a host of merchant services around its payments suite. The Square Card - a debit card that...