Digital Disciplines. Wiersema Fred

that have vehicles, not unlike a taxi company. The infrastructure – drivers and their vehicles, but also roads, tunnels, and bridges, and cell phone towers and networks – is not owned or operated by Uber. Yet asset-less Uber recently had a valuation of $40 billion.51

      The rationale for the unbundled corporation argument reverses a nearly century-old insight from economist Ronald Coase. He asked a deceptively simple question regarding why firms should exist. After all, it is not unheard of for individuals to band together to achieve a common goal, say, raising a barn, without formally incorporating.

      Coase argued that firms exist as a way of minimizing certain kinds of costs. After all, in a loosely coupled network of individuals, there are costs not found in a standing corporate organization. These include costs such as those required to identify personnel with the right skills (search costs) and those to then contract for tasks (transaction costs). A company with a stable organization of employees could be more efficient over time than an ad hoc collection of individuals.

      Hagel and Singer, though, said that information technologies reduce the need for such integration, enabling firms to be smaller yet still interact efficiently with those in complementary businesses. Consequently, firms could be smaller and more focused. Thus, they argued that an integrated firm could actually subdivide or unbundle into smaller firms focused on either operational excellence of their infrastructure, product leadership through innovation, or intimate customer relationships.

      The bottom line: Whether or not a company does unbundle, it is important to understand the locus of strategic focus: operations, products, or relationships.

      Business Model Generation

      In Business Model Generation, Alexander Osterwalder and Yves Pigneur created what they call the business model canvas, which provides a high-level framework for specifying various choices to configure or restructure businesses. In their approach, they divide firm choices into nine major areas.52

      The first three areas are activities (i.e., processes), partners, and resources (i.e., assets), which Hagel and Singer would presumably refer to as infrastructure; the relevance to operational excellence is clear.

      Value propositions are another major category. As usual, the intent is to consider the benefit provided to the customer. It can be quantitative – say, a 10 percent reduction in heating bills – or qualitative – say, a not-to-be-missed entertainment experience. Since the value proposition is generated by the total product/service, including tangible and intangible elements, it's an area where product leadership or product innovation is essential.

      Next, there are three areas of customer interaction: customer segments, customer relationships, and channels. The channels category includes communication such as marketing and advertising, distribution, and sales. Hagel and Singer would presumably consider these three areas in total to be customer relationship management, and Treacy and Wiersema would likely consider customer intimacy to be the relevant value discipline.

      In addition, they delineate the underlying cost structure and revenue streams associated with these, which are areas for development of unique business and pricing models, such as, say, the “razor and razor blade” approach where the razors are low margin but the blades are highly profitable.

      Each of the nine areas has a number of different options, and the total configuration of these options defines a business model. For example, customer segments might include the mass market, niche markets such as wealthy Brazilian expatriates with teenage children living in Ohio, or a diversified approach comprising multiple unrelated segments. Revenue streams might be based on physical product sales, delivery and ownership, or on a rental model, or based on third parties, such as advertisers. So, a particular business model might involve, say, online distribution (channel) of thermostats that can cut heating bills by 10 percent (the product and its value proposition) built by overseas manufacturers (partners) to wealthy Brazilian parents residing in Ohio (segment) that can display ads and therefore are free to homeowners because the advertisers pay (revenue stream).

      While they identified a variety of business model patterns, such as the long-tail business (think Amazon.com and its broad portfolio of products), multisided platforms (think pay-walled or physical newspapers that sell subscriptions to readers and ads to advertisers), and freemium models (e.g., free-to-play mobile games that then sell virtual goods), the first pattern that they identify is based on this primary division into value disciplines or unbundled corporation components: basically operations/infrastructure/processes, products/services, and relationships.53

      Michael Porter and Competitive Advantage

      Another model worth reviewing originated with strategy guru Michael Porter. In his “five forces” model of competition, industry profitability depends on the bargaining power of suppliers, the bargaining power of buyers, the threat of substitutes, the threat of new entrants, and the intensity of industry rivalry.

      Each of these forces has a variety of drivers. For example, buyers have greater bargaining power when they are concentrated or buy large amounts relative to the size of vendors, when their switching costs are low, when they can easily decide to backward integrate, when their profitability is low, forcing them to be cost conscious, when they have information about cost drivers, and when the firm selling to them has heavy fixed costs.

      In light of these forces, Porter argued that “the best strategy for a given firm is ultimately a unique construction reflecting its particular circumstances.”54 In other words, there is no one-size-fits-all approach that all companies should take; they each must consider their industry, the five forces, and their unique positioning and capabilities.

      However, Porter posited that there are three major generic strategies. Business units can compete either based on “overall cost leadership,” “differentiation,” or “focus.” Retailing offers examples of companies utilizing these different generic strategies. Wal-Mart is a company that offers low cost; Neiman-Marcus is one that is differentiated through service; and Victoria's Secret is one that offers focus.

      According to Porter, overall cost leadership means excelling at developing a product or service cost structure lower than competitors based on a variety of approaches. These may include economies of scale; experience curve effects (i.e., learning over time) and through high production volumes (i.e., experience, how to build products or offer services more cost effectively); rigorous management of costs, by, for example, renegotiating supplier contracts; and eliminating unprofitable customers or segments. Cost leadership is a competitive strategy, not a value discipline, in Porter's formulation. In other words, cost leadership might translate into lower prices to customers, but the company might leave prices at market parity and keep the outsize profits or use them to invest in, say, geographic expansion or new product offerings. As a competitive strategy, the point is that the cost leader can survive buffeting from the five forces. For example, strong buyer power that reduces pricing may impact the profitability of the cost leader, but will drive the cost laggard out of business.

      Differentiation entails creating unique products or services in a variety of ways. Porter explained that such uniqueness can be based on functionality, design and aesthetics, brand, technology, distribution channels, or advanced technology. With cost leadership, even if pricing is identical, profitability is higher because cost structure is lower. With differentiation, profitability is higher even without cost advantages because customers are willing to pay for these unique capabilities. In some cases, higher prices may be based on perceived benefits such as ego value, such as a Prada bag or Bentley automobile. In other cases, higher prices may be justifiable because advanced product or service capabilities are more financially beneficial to the customer. Differentiation also insulates firms from the five forces. For example, brand loyalty can reduce buyer power by increasing perceived switching costs.

      The third generic strategy is focus, either on a narrower product line, a particular customer segment, or a constrained

51

Dan Primack, “Uber Reportedly Valued at $40 Billion by Investors,” Fortune.com, November 25, 2014, fortune.com/2014/11/25/uber-reportedly-valued-at-40-billion-by-investors/.

52

Alexander Osterwalder and Yves Pigneur, Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers (Hoboken, NJ: John Wiley & Sons, 2010).

54

Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980), 34.