Disintermediation

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The disintermediation process Disintermediation graphic.PNG
The disintermediation process
Intermediary B may be bypassed by A to connect with C directly Arrow diagram transitive.png
Intermediary B may be bypassed by A to connect with C directly
Although Webvan failed in its goal of disintermediating the North American supermarket industry, several supermarket chains (like Safeway Inc.) have launched their own delivery services to target the niche market to which Webvan catered. Safewaydeliverytruck.jpg
Although Webvan failed in its goal of disintermediating the North American supermarket industry, several supermarket chains (like Safeway Inc.) have launched their own delivery services to target the niche market to which Webvan catered.

Disintermediation is the removal of intermediaries in economics from a supply chain, or "cutting out the middlemen" in connection with a transaction or a series of transactions. [1] Instead of going through traditional distribution channels, which had some type of intermediary (such as a distributor, wholesaler, broker, or agent), companies may now deal with customers directly, for example via the Internet. [2]

Contents

Disintermediation may decrease the total cost of servicing customers and may allow the manufacturer to increase profit margins and/or reduce prices. Disintermediation initiated by consumers is often the result of high market transparency, in that buyers are aware of supply prices direct from the manufacturer. Buyers may choose to bypass the middlemen (wholesalers and retailers) to buy directly from the manufacturer, and pay less. Buyers can alternatively elect to purchase from wholesalers. Often, a business-to-consumer electronic commerce (B2C) company functions as the bridge between buyer and manufacturer.

However manufacturers will still incur distribution costs, such as the physical transport of goods, packaging in small units, advertising, and customer helplines, some or all of which would previously have been borne by the intermediary. To illustrate, a typical B2C supply chain is composed of four or five entities. These are the supplier, manufacturer, wholesaler, retailer and buyer.[ citation needed ]

History

The term was originally applied to the banking industry in 1967; disintermediation occurred when consumers avoided the intermediation of banks by investing directly in securities (government and private bonds, insurance companies, hedge funds, mutual funds and stocks) rather than leaving their money in savings accounts. [3] [4] The original cause was a U.S. government regulation (Regulation Q) which limited the interest rate paid on interest bearing accounts that were insured by the Federal Deposit Insurance Corporation.

It was later applied more generally to "cutting out the middleman" in commerce, though the financial meaning remained predominant. Only in the late 1990s did it become widely popularized.[ citation needed ]

It has been argued that the Internet modifies the supply chain due to market transparency.[ citation needed ] Disintermediation has acquired a new meaning with the advent of the virtual marketplace.[ citation needed ] The virtual marketplace sellers like Amazon are edging out the middlemen. Direct sellers and buyers connect with each other because of the platform created by the virtual marketplace vendor. There is quid pro quo for the vendor for the use of the platform, else it would make no business sense to create such a platform. If the buyer, having connected with the seller, circumvents the platform and talks to the seller and does her deal directly with the seller, then the platform owner is unlikely to get her revenue share. This may be considered a new form of disintermediation.[ citation needed ]

Discussion

In the non-Internet world, disintermediation has been an important strategy for many big box retailers like Walmart, which attempt to reduce prices by reducing the number of intermediaries between the supplier and the buyer. Disintermediation is also closely associated with the idea of just in time manufacturing, as the removal of the need for inventory removes one function of an intermediary. The existence of laws which discourage disintermediation has been cited as a reason for the poor economic performance of Japan and Germany in the 1990s.[ citation needed ]

However, Internet-related disintermediation occurred less frequently than many expected during the dot com boom. Retailers and wholesalers provide essential functions such as the extension of credit, aggregation of products from different suppliers, and processing of returns. In addition, shipping goods to and from the manufacturer can in many cases be far less efficient than shipping them to a store where the consumer can pick them up (if the consumer's trip to the store is ignored). In response to the threat of disintermediation, some retailers have attempted to integrate a virtual presence and a physical presence in a strategy known as bricks and clicks.

Reintermediation

Reintermediation can be defined as the reintroduction of an intermediary between end users (consumers) and a producer. This term applies especially to instances in which disintermediation has occurred first. [2]

At the start of the Internet revolution, electronic commerce was seen as a tool of disintermediation for cutting operating costs. The concept was that by allowing consumers to purchase products directly from producers via the Internet, the product delivery chain would be drastically shortened, thereby "disintermediating" the standard supply model middlemen. However, what largely happened was that new intermediaries appeared in the digital landscape (e.g.,  Amazon.com and eBay). [5]

Reintermediation occurred due to many new problems associated with the e-commerce disintermediation concept, largely centered on the issues associated with the direct-to-consumers model. The high cost of shipping many small orders, massive customer service issues, and confronting the wrath of disintermediated retailers and supply channel partners all presented real obstacles. Huge resources are required to accommodate presales and postsales issues of individual consumers. Before disintermediation, supply chain middlemen acted as salespeople for the producers. Without them, the producer itself would have to handle procuring those customers. Selling online has its own associated costs: developing quality websites, maintaining product information, and marketing expenses all add up. Finally, limiting a product's availability to Internet channels forces the producer to compete with the rest of the Internet for customers' attention, a space that is becoming increasingly crowded.[ citation needed ]

Examples

Notable examples of disintermediation include Dell and Apple, which sell many of their systems direct-to-consumer — thus bypassing traditional retail chains, having succeeded in creating brands well recognized by customers, profitable and with continuous growth.

In the automotive industry

Tesla avoids using dealers as middlemen by offering their own outlets, which have only a few vehicles for display and test driving; customers complete their full purchase online. This approach allowed Tesla to raise auto gross profit by about 34%. This strategy also allows Tesla to control more of its customers' experience and build online community. [6] Following Tesla's success, two other automotive brands, Audi and General Motors, decided to start trials of direct sales in 2012 and 2013 respectively. [7] [8]

See also

Related Research Articles

E-commerce is the activity of electronically buying or selling of products on online services or over the Internet. E-commerce draws on technologies such as mobile commerce, electronic funds transfer, supply chain management, Internet marketing, online transaction processing, electronic data interchange (EDI), inventory management systems, and automated data collection systems. E-commerce is in turn driven by the technological advances of the semiconductor industry, and is the largest sector of the electronics industry.

<span class="mw-page-title-main">Wholesaling</span> Sale of goods or merchandise to retailers rather than end consumers

Wholesaling or distributing is the sale of goods or merchandise to retailers; to industrial, commercial, institutional or other professional business users; or to other wholesalers and related subordinated services. In general, it is the sale of goods in bulk to anyone, either a person or an organization, other than the end consumer of that merchandise. Wholesaling is buying goods in bulk quantity, usually directly from the manufacture or source, at a discounted rate. The retailer then sells the goods to the end consumer at a higher price making a profit.

<span class="mw-page-title-main">Vertical integration</span> When a company owns its supply chain

In microeconomics, management and international political economy, vertical integration is an arrangement in which the supply chain of a company is integrated and owned by that company. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need. It contrasts with horizontal integration, wherein a company produces several items that are related to one another. Vertical integration has also described management styles that bring large portions of the supply chain not only under a common ownership but also into one corporation.

<span class="mw-page-title-main">Distribution (marketing)</span> Making products available to customers

Distribution is the process of making a product or service available for the consumer or business user who needs it, and a distributor is a business involved in the distribution stage of the value chain. Distribution can be done directly by the producer or service provider, or using indirect channels with distributors or intermediaries. Distribution is one of the four elements of the marketing mix: the other three elements being product, pricing, and promotion.

<span class="mw-page-title-main">Name your own price</span> Pricing strategy

Name your own price (NYOP) is a pricing strategy under which buyers make a suggestion for a product’s price and the transaction occurs only if a seller accepts this quoted price. What happens is that the seller waits for a potential buyer's offer and can then either accept or reject that 'named price' that the user had offered. As the Internet is continuously being developed and online marketplaces are becoming increasingly more popular, consumers have more choices in terms of product pricing. Popularized by the reverse auction pioneer, Priceline.com, such pricing strategy asks consumers to 'name their own price' for various products and services like air tickets, hotels, rental cars, etc. The first bid a consumer places and the subsequent bid increments express the consumer's willingness or unwillingness to haggle. "The economic argument is that the number of bids a consumer submits to win a product in a NYOP auction is determined by the bidder’s intention to trade off higher expected savings from haggling against the associated frictional costs". NYOP retailers do not post a price for their products, and the final price of the transaction is only determined via a "reverse auction process", and these are key features that distinguish hotels and travel intermediaries from NYOP retailers. Similarly, LetYouKnow, Inc. pioneered the application of its own patented matching method within confines of the reverse auction process, whereby consumers name their own price for new vehicles.

Drop shipping is a form of retail business in which the seller accepts customer orders without keeping stock on hand. Instead, in a form of supply chain management, the seller transfers the orders and their shipment details either to the manufacturer, a wholesaler, another retailer, or a fulfillment house, which then ships the goods directly to the customer.

<span class="mw-page-title-main">Business-to-business</span> Commercial transaction between businesses

Business-to-business is a situation where one business makes a commercial transaction with another. This typically occurs when:

<span class="mw-page-title-main">Car dealership</span> Business which sells, buys, and trades new and/or used cars, trucks, SUVs, and vans

A car dealership, or car dealer, is a business that sells new or used cars, at the retail level, based on a dealership contract with an automaker or its sales subsidiary. Car dealerships also often sell spare parts and automotive maintenance services.

B2B e-commerce, short for business-to-business electronic commerce, is the sale of goods or services between businesses via an online sales portal. In general, it is used to improve the efficiency and effectiveness of a company's sales efforts. Instead of receiving orders using human assets manually – by telephone or e-mail – orders are received digitally, reducing overhead costs.

An online marketplace is a type of e-commerce website where product or service information is provided by multiple third parties. Online marketplaces are the primary type of multichannel ecommerce and can be a way to streamline the production process.

Channel conflict occurs when manufacturers (brands) disintermediate their channel partners, such as distributors, retailers, dealers, and sales representatives, by selling their products directly to consumers through general marketing methods and/or over the Internet.

A marketing channel consists of the people, organizations, and activities necessary to transfer the ownership of goods from the point of production to the point of consumption. It is the way products get to the end-user, the consumer; and is also known as a distribution channel. A marketing channel is a useful tool for management, and is crucial to creating an effective and well-planned marketing strategy.

<span class="mw-page-title-main">Vendor</span> Supplier of goods or services

In a supply chain, a vendor, supplier, provider or a seller, is an enterprise that contributes goods or services. Generally, a supply chain vendor manufactures inventory/stock items and sells them to the next link in the chain. Today, these terms refer to a supplier of any goods or service.

Direct-to-consumer (DTC) or business-to-consumer (B2C) is the business model of selling products directly to customers and thereby bypassing any third-party retailers, wholesalers, or any other middlemen. Direct-to-consumer sales are usually transacted online, but direct-to-consumer brands may also operate physical retail spaces as a complement to their main e-commerce platform in a clicks-and-mortar business model.

<span class="mw-page-title-main">E-commerce credit card payment system</span>

Electronic commerce, commonly known as e-commerce or eCommerce, or e-business consists of the buying and selling of products or services over electronic systems such as the Internet and other computer networks. The amount of trade conducted electronically has grown extraordinarily with widespread Internet usage. The use of commerce is conducted in this way, spurring and drawing on innovations in electronic funds transfer, supply chain management, Internet marketing, online transaction processing, electronic data interchange (EDI), inventory management systems, and automated data collection systems. Modern electronic commerce typically uses the World Wide Web at least at some point in the transaction's lifecycle, although it can encompass a wider range of technologies such as e-mail as well.

Wholesale fashion distribution refers to the global market of bulk clothing sales, in which producers, wholesalers and sellers are involved in a commercial, business-to-business process.

There are many types of e-commerce models', based on market segmentation, that can be used to conducted business online. The 6 types of business models that can be used in e-commerce include: Business-to-Consumer (B2C), Consumer-to-Business (C2B), Business-to-Business (B2B), Consumer-to-Consumer (C2C), Business-to-Administration (B2A), and Consumer-to-Administration

Pretail is a sub-category of e-commerce and online retail for introducing new products, services, and brands to market by pre-launching online, from creating an interest waitlist of signups before launch to collecting reservations or pre-orders in limited quantity before release, realization, or commercial availability. Pretail allows new product ideas/prototypes to be mass produced only when they have reached an initial threshold of buy-in from investors/consumers. Pretail includes pre-sale commerce, pre-order retailers, pre-launch marketing services, incubation marketplaces, crowdfunding communities, and demand chain management systems.

Re-intermediation in banking and finance can be defined as the movement of investment capital from non-bank investments, back into financial intermediaries. This is usually done in efforts to secure depository insurance on the capital, during times of high risk and volatility in market interest rates. Conceptually, reintermediation can be thought of as an answer to disintermediation, which is the movement of investment funds away from financial intermediaries into other investments. Disintermediation occurs naturally, as competition from different financial firms can allow for higher investment yield, which causes funds to flow away from depository institutions.

The disruptive effect of e-commerce on the global retail industry has been referred to as the Amazon Effect: the term refers to Amazon.com's dominant role in the e-commerce market place and its leading role in driving the disruptive impact on the retail market and its supply chain.

References

'Notes

  1. ↑ Wake Forest. Infinite Financial Intermediation. page 50. Law Review 643 (2015)
  2. 1 2 Chircu, Alina M.; Robert J. Kauffman (1999). "Strategies for Internet Middlemen in the Intermediation/Disintermediation/Reintermediation Cycle". Electronic Markets. 9 (1–2): 109–117. CiteSeerX   10.1.1.102.6089 . doi:10.1080/101967899359337.
  3. ↑ Gellman, R. (1996). Disintermediation and the Internet. Government information quarterly, 13(1), 1-8.
  4. ↑ Belke, Ansgar; Thorsten Polleit (2011). Monetary Economics in Globalised Financial Markets. Springer Science & Business Media. p. 73. ISBN   978-3540710028 . Retrieved 9 January 2017.
  5. ↑ Sarkar, Butler and Steinfield. Intermediaries and Cybermediaries: A Continuing Role for Mediating Players in the Electronic Marketplace. 1995.
  6. ↑ Dans, Enrique (2013-10-11). "The automotive industry and the trend towards disintermediation". Enrique Dans. Retrieved 2021-11-02.
  7. ↑ Read, Richard. "Audi Opens Digital Showroom: Is This The Future Of Shopping?". The Car Connection. Retrieved 2021-11-20.
  8. ↑ Read, Richard. "GM Follows Tesla's Lead, Plans To Sell Directly To Online Shoppers". The Car Connection. Retrieved 2021-11-20.

Bibliography

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