Disintermediation: the good, the bad, and the ugly
blogDecember 14, 2018
Johan Boström, our co-founder and evangelist, explains how digital has evolved to eliminate intermediaries whose cost to service has become greater than the value they provide.
Digital has evolved from simply enabling the business strategy to actually driving business strategy. One of the reasons is that digitization simplifies the removing of intermediaries from the traditional supply chain—one that typically consists of a manufacturer selling to a distributor that, in turn, sells to a retailer that sells to a consumer. This phenomenon of removing intermediaries in the supply chain—such as manufacturers selling direct to consumers by cutting out distributors and retailers—is called disintermediation. Simply put, disintermediation eliminates intermediaries whose cost to service has become greater than the value they provide.
Transparency and disintermediation
I believe that disintermediation is, to a large extent, a consequence of the transparency that the vast amount of readily available product information creates. It empowers the end-customer and makes it fast and convenient to compare offerings by product properties and price—regardless of seller. By removing actors from the supply chain, disintermediation decreases cost and allows the manufacturer to both increase margins and, at the same time, create a direct relationship with the end-customer.
However, it is not only the manufacturers that are taking advantage of disintermediation. Retailers like WalMart and marketplaces like Amazon are also working on reducing the number of intermediaries in the supply chain. There are even credible rumors that Amazon plans to launch a global shipping and logistics operation that will compete with UPS and FedEx, thus creating disintermediation in the logistics industry itself.
Diminishing brand loyalty and disintermediation
In some cases, it is more efficient to use a distributor for shipping smaller orders than going direct. The economy of scale makes certain products and order types hard to manage without the services and facilities that a distributor provides. However, in most cases, it works fine to ship direct or use drop shipping, resulting in distributors being bypassed by manufacturers and retailers. However, in the transparent marketplace, brand value is rapidly diminishing, making it easier for a retailer’s private labels to compete with the well-known brands from the manufacturers. Diminishing brand value coupled with disintermediation creates a threat for the branded manufacturers that they need to acknowledge and address if they want to earn the consumer’s business.
Customer experience and disintermediation
I think it is safe to say that disintermediation is affecting distributors more than manufacturers and retailers. However, all actors can and will be affected and need to rethink their value proposition and strategy. Disintermediation is eventually inevitable for all intermediaries whose cost becomes greater than the value they provide, and a big part of the value is the customer experience. As one of the key drivers for disintermediation is information transparency, it is crucial to provide more and better information than your competitors in the supply chain. There is, of course, more to it than that, especially with respect to organizational and logistical challenges. But if you are not getting found and providing a stellar product and customer experience, nothing else will matter.