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By the mid-1980s the PC market was growing rapidly, with multiple manufacturers offering clones of IBM-style computers for both personal and professional uses. Since most consumers were largely uneducated in the new technologies, machines were mass-produced in ‘models’ and distributed quarterly in large quantities to a supply network of retail outlets. Whilst this method proved effective, it was ultimately a highly inefficient sales model due to rapid advancements in technology quickly depreciating large inventories of machines (Mills & Camek, 2004). Resultantly, a new manufacturer, PCs Limited, entered the market in 1985 selling computers directly to consumers through magazine advertisements (Dell, 2012). The company, renamed Dell in 1988, pioneered the ‘configure-to-order’ direct-to-consumer sales model in the PC industry, and enabled consumers to circumvent retail outlets by ordering custom-built machines over the telephone or via the Internet. In eliminating intermediaries in PC distribution, Dell would manufacture only what was ordered, using the latest hardware, and never waste finances on owning depreciating inventory in retail outlets, a business model that lead to its huge growth in the 1990s and 2000s and to become the world’s largest PC manufacturer for several years.
Intermediaries, such as retailers, wholesalers, distributors, dealers, brokers, advisors and agents, are third-party middlemen in the distribution chain that provide additional value in the transaction between producer and consumer, “bridging the gap between the services being provided and the wishes and requirements of those who use the services” (Janssen & Klievink, 2009). For example, car dealerships have historically provided manufacturers with third-party management of the more risk-based car sales process, and provided consumers services such as information, test-drives, trade-ins and continued maintenance schemes. However, since intermediaries are merely secondary services in the broader transaction, it is vital that their costs to either producer or consumer not exceed the value they add to the transaction – else they risk elimination from the supply chain in favor of increased profits or lower prices (Shunk et al., 2007). For example in the PC market, as the costs of depreciating inventory held were greater than the value the middlemen provided, Dell eliminated retail intermediaries from its supply chain in a process of ‘disintermediation’.
In its simplest form, the term ‘disintermediation’ means ‘to remove intermediaries from a supply chain’. It first came into usage in the 1970s during a financial services revolution, in reference to consumers ‘disintermediating’ their financial investments – “cutting out banks and directly investing in the same money markets as the banks” (Hammer, 2000). With the advent of internet-based shopping in the late 1990s the term became a buzzword signifying the elimination of middlemen as a result of direct-to-consumer ecommerce methods (King, 1999). However over the past 15 years, as the markets have settled in new internet-influenced distribution chains, the term has evolved simply to signify “the creation of an enhanced sales network in which consumers deal directly with service providers” (Jallat & Capek, 2001).
As industries grow, the value of intermediaries varies, influenced by factors including technology, industry life cycles, consumer abilities and economic climates. The disintermediation of intermediaries whose cost becomes greater than value, sees the reduction of inefficiencies in the distribution chain, such as a decrease in the time-lapse between production and delivery, and resultantly increases profits for the manufacturer. Furthermore, without middlemen adding additional charges for their services, the final price of the product decreases for the end-consumer – and so potentially increases product demand. Moreover, disintermediation shifts power away from the intermediaries, providing manufacturers access to consumer information and able to build direct consumer relationships – beneficial to both producer and user in aspects such as loyalty, customization and resolving technical issues. However beyond transferring power, disintermediation also comprises a transferal of the various roles intermediaries play in the distribution chain. For as Shunk et al. (2007) state:
Disintermediation of a node in a supply network is a complex process. Removing the middle man often means that companies not only have to reproduce the functionality of the intermediary’s core competence, but also have to replicate the information flow, material flow, and knowledge flow as well as the cash flows of that particular node.
In many ways, disintermediation sees the producer becoming the distributer, and so forced to encounter a broad range of new supply-related issues. For instance in becoming a distributer, the manufacturer becomes a primary competitor of the former intermediaries, thus sabotaging relationships with retailers and other channel partners who may previously have helped build the company. Furthermore, new customer services may be required to replace those eliminated in the disintermediation process (e.g. customer service centers), and distribution-related services must be modified to handle factors such as low order sizes and shipment to consumers.
Since the introduction of ecommerce, countless goods and services have utilized the Internet to bypass intermediaries, with almost all major brands establishing online stores to enable consumers to buy directly from the manufacturer or service provider. In many cases this disintermediation has gone beyond creating enhancements in the supply network, or increasing efficiency, to forever changing the business practices of the entire industry. A prime example of such a radical transformation is in the travel industry, which was also one of the first industries to experience internet-influenced disintermediation. Where travel agencies once advised where to travel, offered travel and tour packages, and generally made the complications of booking travel easier, the internet has transferred travel booking power into the hands of the consumer. Today, if you are a reasonably experienced traveller, you find no value in working with a brick and mortar travel agency when almost every airline and hotel sells directly to consumers through their own websites. A similar situation exists in the insurance industry, as the ability to purchase insurance online has eliminated the need for sales agents.
Internet-influenced disintermediation can also be seen in the media industry, with both performers and media houses circumventing middlemen in broadcast, publishing and distribution. For example, it is becoming more common for entertainers to release material independently via the Internet (e.g. comedian Louis CK’s latest tour video, and industrial rock project Nine Inch Nails’ final record) to avoid the many complications of major production companies or music labels and increase personal profits. Furthermore, the transition in the newspaper industry from print to online sidesteps the need for printing presses, delivery networks, newspaper retailers and unsold inventory, reducing costs in publication whilst offering readers the instant ‘up-to-the-hour’ reporting style of broadcast news networks.
Over the past two decades we have witnessed almost every major industry undergo some form of intermediary shift as a result of internet-based technologies. However, in retrospect, the changes to the sales network have not been as clear-cut as originally envisaged in the late 1990s, as we have by no means witnessed the death of intermediaries. In many cases physical intermediaries have simply shifted to a online equivalent, a concept Jallat and Capek (2001) refer to as “cybermediaries.” For example online services such as Amazon and Expedia, which have contributed to the decline in both bookstores and travel agents, have nothing to do with disintermediation (Moschella, 1997). These online platforms are simply new online “cybermediaries” (Jallat & Capek, 2001) that have emerged as primary competition to their traditional physical equivalents. Resultantly, the observed decline in many intermediaries as a consequence of the Internet has, in many cases, instead been a result of the capabilities of new online intermediaries making their physical competition redundant.
As previously stated, the value of intermediaries varies over time, influenced by factors including technology, industry life cycles, consumer abilities and economic climates. Consequently, the addition of new intermediaries of increasing value is just as common as the elimination of intermediaries of decreasing value. For instance, in the opening example of the PC industry, Dell’s disintermediated business model proved only successful until about 2005. By the latter half of the 2000s the maturing PC market was undergoing another transition, with advancements in hardware no longer offering such drastic changes in machine performance, consumers were buying PCs less frequently and basing purchase decisions increasingly upon factors including retail experience, customer service, brand image and product design. Moreover, consumers became less inclined to buy PCs over the phone or Internet, with large electronics retailers such as Walmart, Staples and BestBuy having built increasing power and influence in the market. After several years of reduced revenues and slow growth, Dell was forced to rebuild relations with the intermediaries it had avoided for two decades and slowly began shipping its product range to major retailers worldwide in a process of ‘reintermediation’.
Reintermediation is the process of adding intermediaries to a disintermediated supply chain. It can occur when pre-existing intermediaries offer a “new value proposition” (Shunk et al., 2007) and reenter the supply chain with a new function (King, 1999), such as the retailers in Dell’s example, or when new intermediaries offer innovative value-adding services to a disintermediated supply chain (Janssen & Sol, 2000), such as many of the new intermediaries offering ecommerce-related services. Therefore, in relation to internet-influenced market changes, there are three types of intermediary shifts: disintermediation, the elimination of intermediaries of decreased value; reintermediation, the addition of intermediaries of new value; and “cybermediaries” (Jallat & Capek, 2001), the shift in provision of intermediary value from a physical to online presence. Resultantly, according to Bailey and Bakos (1997), there are four general intermediary roles:
Aggregation
To aggregate demand as an online equivalent of a traditional intermediary, substituting direct consumer contact for a highly personalized online service that takes full advantage of the “long tail” (Anderson, 2006). Examples include goods retailer, Amazon, travel retailer, Expedia, and cinema ticket retailer, Fandango.
- Matching
To act as a marketplace, matching demand to supply and linking buyers to sellers. Here, a database-driven portal offers a range of products and services that are not held as inventory by the intermediary. Customization can be used in product search to deliver product offerings best suited to the consumer. Examples include auction portal, eBay, travel comparison service, Kayak, and ticket exchange site, StubHub.
- Trust
To counter the loss of trust from a lack of pre-purchase physical contact with a retailer or product, by providing some form of guarantee in online purchases both in financial security and/or product quality. Examples include online financial transaction agents, PayPal or VeriSign, trusted online brand stores such as BestBuy or the iTunes Store, and the user-generated comment/review/rating system offered by most major online retailers.
- Facilitation
To act as a broker in the transferal of information online, managing various financial and administrative factors in ecommerce and other internet-enabled tools. Examples include online travel booking software, Sabre, display advertising media buyer, DoubleClick, crowdfunding site, Kickstarter, and the human-assisted online tools (Roush, 2007), Mechanical Turk and reCAPTCHA.
As we can see, with internet-influenced market changes, intermediaries have evolved beyond simply middlemen in distribution channels to become what Pinto (2000) defines as “infomediaries.” These companies go beyond just physical distribution to build relationships with their consumers and suppliers, and provide valuable information and services to the supply chain (Hammer, 2000). As Pinto (2000) states, “it doesn’t matter on whose shelf the product resides anymore; what really matters is making the transaction seamless and making sure the customer has access to the product.” In the auto industry, car dealers are a perfect example of a modern “infomediary”, providing crucial value to consumers and manufacturers at multiple stages in the purchase process. For example, a consumer will research cars online, be directed to their local dealer for further information, test drive the car at the dealer, order a customized car online from the manufacturer, and pick it up from the dealership, who will hen continue to service it over its lifespan and trade it in for a new vehicle in a few years time. Through disintermediation and reintermediation the dealership has shifted its “value proposition” (Shunk et al., 2007) away from simply buying and selling cars to become a demonstration center, delivery site and service center.
After almost two decades of mass Internet availability, the disintermediation and cybermediation of the 1990s and early 2000s has decreased with markets seeing increased reintermediation from new firms offering value-adding services for internet-based distribution models. However, as the internet-influenced changes mature, the disintermediation/reintermediation cycle will no doubt commence once again upon the next major change to the distribution-model: 3D printing.
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