Disintermediation

1
Disintermediation

• Intermediaries provide a lot of functions that
  companies will have to replace if true
  disintermediation occurs.
• Intermediaries among many things
• gathers information about customer response/needs
• stimulates demand
• takes possesion of product, therefore assumes
  risk
• stores the product
• distributes the product
• provides financing terms
• All of these items must be addressed, otherwise
  the consumer will be negatively affected. Since
  the consumer is king, companies that do not
  address these items will lose in the long run.

2
Disintermediation I

• The expectation of disintermediation as
  characteristic of web
• Middlemen engage in costly handling, storage and
  transaction costs all of which can be
  eliminated, because . . .
• The really important thing they do is pass on
  information
• E.g. a grocer aggregates the needs re quality and
  quantity of fruit/veg local customers need
• Info can be handled better over net.
• See also http//pages.britishlibrary.net/blwww3/m
  isc/disintermediation.htm in addition to sources
  in notes

3
Disintermediation I (contd)
From Futurist, May/June 1995, Here Come the
Cyberyuppies, by Michael Spalter.

• The information superhighway holds dramatic
  implications for businesses that rely on
  salespeople. Cyberpunks turned cyberyuppies will
  figure out that their superior knowledge of
  intricate electronic networks enables them to
  create businesses with few fixed costs and little
  or no real estate or bureaucracy. Through the
  process known as disintermediation (a fancy term
  for cutting out the middleperson) cyberyuppies
  will rock entire industries with their technical
  know-how by offering new sales and distribution
  mechanisms through online services. Cyberyuppies,
  by bypassing sales agents, will be able to
  significantly lower the sales and general
  administrative costs of conducting business.
  Those executives who resist embracing interactive
  marketing because of their attachment to their
  salespeople will undoubtedly endanger their
  market position to cyberyuppies -- the new
  entrepreneurial elite.

4
Disintermediation I (contd)

• Classic example of disintermediation
• Amazon.com
• Books delivered direct from manufacturer to
  retail customer
• Amazon.com web site manages all customer
  interaction

5
Disintermediation II

• Insightful analysts caution against assuming
  demise of middlemen
• Re-intermediation
• The Value-add community

Out Of The BoxThe Myth Of Disintermediation
July 10, 2000 by Michael Hammer,
http//www.informationweek
6
Disintermediation II (contd)

• Amazon.com is not representative
• Example Air conditioning systems
• Which system to buy?
• Capacity of system?
• Related work (e.g. ducts, electrical)
• Tutoring how to use
• Maintenance
• Books, on the other hand
• No customization
• No maintenance
• No training
• No related work

7
Disintermediation II (contd)

• The value-add community
• Internet should/could eliminate buying/selling
  between intermediaries
• Source of unnecessary expense
• Transaction costs
• Possession and storage costs
• Bargaining between intermediaries
• Still very much needed value-add for customer
• Provided by other companies not manufacturer
• Mfr does not have presence/skills for all
  value-add
• Manufacturer pays them commission for service

8
Disintermediation II (contd)

• Example Buying a new car
• Current
• Dealer provides info, test-drive, sale, service,
  maintenance (dealer possession)
• With internet
• User researches cars on Internet
• Test-drive at dealer
• Order from manufacturer over Internet
• Pick up car at dealer
• Sales and service at dealer
• (no dealer possession)

9
Disintermediation III

• Real-life example of intermediary role

Levi Strauss Cans E-Commerce Venture Reported by
Newsbytes.com, http//www.newsbytes.com SAN
FRANCISCO, CALIFORNIA, U.S.A., 1999 OCT 29 (NB).
While more and more retailers are trying to
expand their presence to e-commerce sites,
clothing manufacturer Levi Strauss and Co,. has
decided to pull the plug on its online store. The
company confirmed Friday that it is abandoning
its year-old e-commerce site, citing maintenance
costs, even though it was satisfied with the
site's performance. Over the next four months,
customers to Levi's site will be redirected to
purchase its clothing at its brick-and-mortar
stores and at retail partner sites such as Macy's
( http//www.macys.com ) and JC Penny (
http//www.jcpenny.com ), Beckman said. The move
signifies somewhat of an olive branch by Levi,
after the company reportedly angered some
retailers when it refused to let them sell Levi
products through their own Web sites.
10
Disintermediation III (contd)

• Commentary on the Levi-Strauss move

. . . as jeans maker Levi-Strauss discovered,
disintermediation isn't the golden goose it seems
to be. After investing millions of dollars in an
online venture to sell jeans to the public, it
switched course and announced that jeans would be
sold only through its retailer partners. The
problems with dealing direct with the customer is
the customer small orders, returns, complaints,
shipping and all the other issues that make up
customer service. As Levi's discovered, the
problems that surround customer service multiply
with the orders. Keeping a million people who've
placed orders for a single pair of jeans happy is
harder than keeping a few big chains with huge
orders satisfied. From The Dot-com Bubble-Burst
and Disintermediation January 9, 2001 By
InternetNews.com Staff from http//www.internetn
ews.com/bus-news/article/0,,6_554641,00.html
11
Disintermediation IV

• The current view (everyone thinks middlemen are
  wonderful)

12
Disintermediation still (seems to be) effective

• Seems to working at
• Amazon
• E-Trade
• But
• Amazon has serious problems from
• Newer entries that have simply copied the model
  and dropped prices still further
  (booksamillion.com)
• The serious incumbents that have genuine industry
  expertise advantages yet are able to be
  forward-looking enough to leverage that expertise
  in the new medium (barnesandnoble.com)
• While Etrade may be viewed as benefitting from a
  different advantage than disintermediation entry
  barrier lowering
• Disintermediation normally means eliminating a
  role that has served by consensus of industry
  players (i.e. a form of monopoly), or to
  undertake necessary inventory/distribution/custome
  rservice.
• A different kind of intermediary relates to
  barriers to entry e.g.
• to trade on NYE you need a very expensive license
• To ship at cost you need to own ships, or to turn
  over enough shipping business that ship owners
  need you
• In each of the above cases repectively, retail
  customer needs were not worth the trouble
  (handling cost) to the licensor or the shipper
• This is changed by technology that puts all
  necessary information at users fingertips as
  well as making the handling of the transaction
  highly automated, thus eliminating the primary
  handling costs of retail trade advice and
  execution.
• Conclusion Etrade succeeded by creating a new
  market reality one where a previous barrier to
  entry was eliminated.
• p.s. -- once Etrade has settled in however,
  theres nothing to stop look-alikes from
  providing virtually identical service for
  progressively lower prices until margins are
  squeezed to nearly nothing thus approaching a
  non-profit, cost-realistic public service.
• In particular, note Etrades move into intl
  markets to spur growth something thats slowed
  dramatically in domestic market in just, what?
  3 yrs!!

13
Entry Barrier Lowering

• Disintermediation normally means
• eliminating a role required by consensus of
  industry players (i.e. a form of monopoly), or
• undertake necessary inventory/distribution/custome
  r service.
• A different kind of intermediary relates to
  barriers to entry e.g.
• to trade on NYE you need a very expensive license
• To ship at cost you need to own ships, or to turn
  over enough shipping business that ship owners
  need you
• In each of the above cases repectively, retail
  customer needs were not worth the trouble
  (handling cost) to the licensor or the shipper
• This is changed by technology that puts all
  necessary information at users fingertips as
  well as making the handling of the transaction
  highly automated, thus eliminating the primary
  handling costs of retail trade advice and
  execution.
• Conclusion Etrade succeeded by creating a new
  market reality one where a previous barrier to
  entry was eliminated.

14
E-Trade (contd)

• P.s. -- once Etrade has settled in however,
  theres nothing to stop look-alikes from
  providing virtually identical service for
  progressively lower prices until margins are
  squeezed to nearly nothing thus approaching a
  non-profit, cost-realistic public service.
• In particular, note Etrades move into intl
  markets to spur growth something thats slowed
  dramatically in domestic market in just, what?
  3 yrs!!