Why do companies decide to unbundle their lines of business?

By Brent Radcliffe AAA
A:

Corporate philosophy has long held that the three major activities that drive a business – finding and retaining customers, developing new products and services, and maintaining the infrastructure needed to conduct business activities – have to be managed by a single entity. Allowing any of these processes to be managed by a third party is expected to increase interaction costs. Companies have begun to discover, however, that the needs of these three processes can conflict with each other, and that unbundling businesses may help them counter more specialized companies which could provide  similar offerings more efficiently.

In recent years, companies have discovered that there are limits to the gains created by having all three processes in one organization. While the three major business activities are imperative to company success and must coexist, the fundamental needs of any single activity may conflict with another activity’s needs. Management has to make decisions that are the least painful to all three activities, but not necessarily the best for any one single activity.

Companies want their clients to spend as much money with them as possible, which has traditionally led companies to offer a broad range of products and services. Tech companies, for example, may offer software, hardware, cloud storage, and consultative services. Managing so many offerings can slow the company down, making it less innovative. At the same time, in order to achieve scale with so many offerings the company must sell as many units as possible.

Rather than try to manage all three major activities in house, companies may outsource them to others who can manage those activities more efficiently. Rather than buy expensive servers, for example, companies can use cloud services. Instead of developing software in house, a company may seek out a specialist to create the software and instead focus on attracting more clients. Unbundling activities that are no longer considered core functions is a radical step that can make companies squeamish, but is a necessary undertaking that will keep companies competitive in some cases.

RELATED FAQS

  1. What's the lowest year-over-year inflation rate in the history of the U.S.?

    Learn about years with the lowest year-over-inflation in U.S. history. Read about how inflation is calculated using the consumer ...
  2. What is the difference between inflation and deflation?

    Determine how inflation and deflation affect prices and employment. Economies frequently teeter between these two economic ...
  3. How can inflation be good for the economy?

    Find out why some economists and public policy makers believe that inflation is a good, or even necessary, phenomenon to ...
  4. What causes inflation, and does anyone gain from it?

    Learn how inflation affects what you pay for everyday items. Natural disasters, consumer confidence and corporate decisions ...
RELATED TERMS
  1. Unbundling

    The process of taking over a large company with several different ...
  2. Horizontal Integration

    The acquisition of additional business activities that are at ...
  3. Vertical Integration

    When a company expands its business into areas that are at different ...
  4. Bundling

    A marketing strategy that joins products or services together ...
  5. Protected Cell Company (PCC)

    A corporate structure in which a single legal entity is comprised ...
  6. Plant Patent

    An intellectual property right that protects a new and unique ...
Related Articles
  1. Conglomerates: Risky Proposition?
    Bonds & Fixed Income

    Conglomerates: Risky Proposition?

  2. Airbnb Brings P2P Markets to Hotel Industry
    Economics

    Airbnb Brings P2P Markets to Hotel Industry

  3. Hotel Disruptor: Airbnb's Sharing Economy ...
    Economics

    Hotel Disruptor: Airbnb's Sharing Economy ...

  4. Hong Kong And China's Touchy Ties
    Investing

    Hong Kong And China's Touchy Ties

  5. What Merger And Acquisition Firms Do
    Investing Basics

    What Merger And Acquisition Firms Do

Trading Center