By Rohit Bhagal

The traditional boundaries of business are under attack. Vertically-integrated value chains are coming apart. Individual businesses within value chains that bundle physical and information services are also vulnerable. Markets are intruding into the web of proprietary arrangements that have held these bundles together.

Is this baseless provocation? Consider a typical automotive dealership. As a physical distributor, a dealership is less efficient than pooled sub-urban or regional inventory. Repairs are, typically, more expensive than when offered by specialised mechanics. As information-providers, salesmen are poorly trained and biased. Availability and delivery of information is, generally, sketchy. The financing is overpriced.

What, then, holds these activities together? And makes the bundle collectively advantaged when the activities are individually disadvantaged? Nothing but the customer's economics of searching: the high cost of acquiring comparative information about price, service, delivery, quality, and interest-rates versus the convenience of having them bundled, albeit sub-optimally, in the dealership. Fortunately for customers, the new economics of information is unravelling such sub-optimal bundles. Customers can search electronically for the best credit and insurance across several offers. Conveniently-located repair-chains can offer quality service. The logic of the bundled dealership is, rapidly, being undermined.

The lesson: Every single activity in a business bundle will have to be competitive and profitable in its own right. Otherwise, the bundle will be ripped apart by focused competitors. Deconstruction will occur wherever information economics holds a physical bundle together, and wherever the informational activities can become a separate business. The same logic, with varying speed and intensity, applies to the vertically-integrated value chain.

Deconstruction will occur when activities across a value chain cross-subsidise one another, or when the economics of one activity are compromised for the sake of another. Deregulation and sophisticated capital markets allow markets to prevail at every step of the value chain. But the most powerful force that is subverting conventional value chains-partly because it acts as a catalyst for all the others-is a revolution in the economics of information. Information has always been the glue that held value chains together.

That glue is now withering. The resulting tension is deconstructing value chains and bundled businesses. On the one hand, proprietary linkages give way to markets. Witness the outsourcing trend: companies can now make use of key activities in the value chain without owning them. On the other hand, opportunities for rich communication and collaboration between customers and suppliers are greater than ever. Both these developments undermine vertical integration and bundling, replacing them with a highly-flexible mix of new co-ordination mechanisms, ranging from the ruthlessness of the spot market at one extreme to the most strategic of partnerships at the other.

So, what are the implications for India? Take the example of the automotive industry. In a world of consolidating global OEMs, can Indian OEMs continue to make the capital investments that are required for competitive R&D, manufacturing, and assembly? More importantly, should they do so? Or should they proactively deconstruct and operate only in those links of the value chain where they have advantages?

As traditional value chains deconstruct, fundamentally new business models begin to appear. In some cases, a start-up mounts a direct attack on our established business model by splitting information-flows from physical-flows. A more common pattern begins when a vertically-integrated incumbent recognises the opportunity to outsource non-strategic or particularly capital-intensive parts of the value chain even as it continues to dominate the whole. In these cases, integration gives way to orchestration.

But maintaining control of the value chain is not easy. The orchestrated have every incentive to drive for scale and scope themselves. If they succeed, these layer-masters wrest control of the value chain. The business, then, deconstructs entirely. The onset of fragmentation can, however, create opportunities for new sort of player-navigators that help participants cope with the complexity of conducting business in a deconstructed world. The strategic implications of deconstruction are profound and wide-ranging:

• The traditional definition of businesses and industries and, therefore, the reference set of competitors, suppliers, and customers becomes obsolete.
• Competitive advantage is de-averaged. Businesses in which the economics of one activity is compromised for the sake of the whole will be vulnerable.
• Advantage across the entire value chain no longer matters; advantage in each section does.
• Horizontal strategies-those that leverage layer capabilities across previously-distinct businesses-become serious alternatives to traditional strategies of vertical integration.
• The boundaries of the corporation become fluid and permeable. Ownership is no longer a condition for effective co-ordination or control.
• In a competitive environment characterised by deconstruction, commitment to existing business models, however rational they may appear, becomes a liability, and the attacker has the advantage.
• Incumbents are under threat from unfamiliar intruders, but they also have unprecedented opportunities.

The end of the 19th Century saw the construction of the vertically-integrated value chain that came to define modern business. Individual businesses within these value chains exploited high consumer-search costs to artificially bundle physical and informational flows. Ask yourself: is your business or your industry a sitting duck for deconstruction? Can you create an exciting new business model, maybe even as an information intermediary?

You will have to overcome visceral organisational resistance. So, begin by deconstructing your organisation's shared beliefs-starting with questioning some of your most deeply-held assumptions about where you are competitively advantaged versus where you are potentially exposed. The introspection may be revealing. It may even be the difference between imminent deconstruction and long-term prosperity.

Rohit Bhagat is the Managing Director of the Boston consulting Group (India)

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