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Disintermediation

DISINTERMEDIATION

In the business world, third parties like distributors traditionally served as links between the consumers and manufacturers or providers of goods and services. Such middlemen also played important roles in the business-to-business sector, connecting companies with various suppliers of parts, components, and raw materials. Disintermediation occurs when third parties are eliminated from the supply chain, allowing direct links between buyers and sellers.

DISINTERMEDIATION, PROS AND CONS

Disintermediation has several advantages. In addition to giving consumers simpler and more direct access to goods and services, it can also mean lower prices, because supply chains are streamlined and the fees charged by distributors and logistics providers are eliminated or sharply reduced. The advent of e-commerce made it possible for many companies to begin selling directly to consumers, some of whom had never done so before.

While the potential to sell directly via the Internet was appealing because of the potential for greater profits, it also had several drawbacks. First, disinter-mediation caused tension between many companies and their business partners, including salespeople, rep firms, distributors, dealers, and retailers. Because of this tension, industry trade associations like the National Automotive Dealers Association and the Wine Wholesalers Association took steps to preserve their roles. Their efforts made it impossible for wineries to sell wine online, or for automobile manufacturers like Ford and Chrysler to bypass local dealers and sell cars directly to consumers.

Another drawback to disintermediation was that some companies failed to identify the kind of infrastructure required for handling fulfillment online. Fulfillment, the act of filling and shipping orders received from customers, is different on the Internet because high volumes of smaller orders are often received. This stands in contrast to traditional fulfillment involving large shipments of product to distributors or retail chains. Successful online fulfillment requires responsive, integrated back-end processes in areas like accounting, customer service, marketing, and shipping. This makes it possible to offer customers real-time information about available products, shipping and order confirmations, problem notifications, and more. Having a fancy Web site to accept orders simply isn't enough, which many companies eventually discovered to their dismay.

EXAMPLES OF DISINTERMEDIATION AND ITS IMPACT

Disintermediation has had varying degrees of impact on different industries. One industry where the Internet has caused noteworthy disintermediation is healthcare. Before the World Wide Web, local health-care providers often served as a primary resource for individuals with questions or concerns about health issues. Furthermore, a doctor's opinion was accepted with little or no question. The explosion in online information had a significant impact on consumers who were thirsty for healthcare information, spurring them to seek answers about healthcare from various Web sites instead of from local professionals.

The Internet also helped to render patients better informed. Just as automobile consumers, armed with information obtained through online research, went to local dealers armed with information about the price and reliability of vehicles, healthcare consumers began investigating health issues and possible treatments prior to visits with physicians. This was beneficial for patients in many cases. In addition to large numbers of articles, online communities and support groups made it possible for people suffering from diseases to share information and strategies about treating and coping with their conditions.

Disintermediation in the healthcare industry had downsides as well. Among the negative factors were the reliability and integrity of the sources from which the information was obtained. In some cases, information was old, outdated, or simply inaccurate. Objections also arose from many physicians who felt their professional skills and authority were being second-guessed. In Health Management Technology, Peter J. Plantes, M.D., explained: "While disintermediation has fueled the growth of e-commerce in many industries, it can have negative consequences for health systems. Removing the local healthcare organization and their physicians from the healthcare equation decreases patients' identification, reliance and access to local resources and healthcare options that can best meet their needs. For healthcare organizations and their physicians, disintermediation erodes the local patient base and creates roadblocks to reaching physicians, and can be in opposition with outreach and integration strategies."

By the early 2000s, disintermediation had infiltrated a wide array of industries. In the packaged goods and toy industries, companies like Nabisco and Mattel sold a percentage of their products directly. In the computer industry, Dell Computer sold directly on an exclusive basis. Because of the company's overwhelming success in the early 2000s, Dell is an excellent example of how disintermediation can work. The company, which climbed to the top of the overall world market in the first quarter of 2001, built computers on demand for both individual consumers and organizations. A large percentage of Dell's direct orders came via the World Wide Web.

The disintermediation caused by e-commerce has affected long-established business channels. Although some third parties have been eliminated altogether, many continue to survive because their services bring real value to the business world. Warehousing, inventory management, storage, and shipping, which collectively fall under the umbrella of logistics, are examples of valuable services offered by intermediaries. Rather than cutting them out of the picture, some manufacturers also have asked third-party business partners to change their focus and provide training or consulting services to customers, thereby becoming value-added services while leaving the selling processes to the companies themselves. Finally, some companies were able to successfully sell both directly and through traditional distributor channels. Herman Miller Inc., a manufacturer of office furniture, used this approach by selling directly to home office users (a market its dealers didn't target), and through dealers to larger corporate accounts. Part of the company's philosophy, which it communicated through regular meetings with dealers, was that home office users might eventually evolve into larger corporate accounts.

Although many predicted the Internet would eliminate most middlemen through disintermediation, e-commerce actually gave birth to many companies for whom acting as intermediaries is a primary focus. According to InfoWorld, "Organizations such as eBay and eLoan, perfect intermediaries, have had such a huge impact on how people search for goods and information. The most successful intermediaries add value by creating more intimate relationships between the partners they serve. Companies quick and agile enough to detect opportunities in complex markets will prosper as intermediaries." Besides eBay and eLoan, NetZero was another example of a third party infomediary that was born during the Internet age. The company offered free Internet access to consumers in exchange for marketing information.

The use of direct sales channels between manufacturers and buyers was expected to significantly increase in the early 2000s, boding well for many companies. Peppers and Rogers Group of Stamford, Connecticut and the Menlo, California-based Institute for the Future conducted a study that revealed a healthy forecast for companies selling direct. The research predicted the number of consumers using the direct sales channel would triple between 1998 and 2010 from 11 percent to 33 percent, respectively. It also forecast consumer direct sales to grow from $190 billion to $1.1 trillion during the same timeframe.

FURTHER READING:

Berghel, Hal. "Predatory Disintermediation." Communications of the ACM, May 2000.

"Consumer Direct Sales To Explode." Web Trend Watch, July 14, 1999. Available from www.mediainfo.com/ephome/news/newshtm/webnews.

Kador, John. "New Economy Rules for Recruiting." InfoWorld, July 3, 2001.

Keenan, William Jr. "E-commerce Impacts Channel Partners." Industry Week, July 19, 1999.

Plantes, Peter J. "Disintermediation: The New Competitor." Health Management Technology, September 2000.

"Progressive Policy Institute: Middlemen Hampering Ecommerce." Nua Internet Surveys, February 1, 2001. Available from www.nua.ie/surveys/index.

Rodgers, Denise. "Who's Afraid of Disintermediation?" Catalog Age, August 2000.

SEE ALSO: Channel Conflict/Harmony; Fulfillment Problems; Order Fulfillment

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