Disintermediation Why Has Disintermediation Through

Disintermediation

Why has disintermediation through e-commerce not occurred to the extent some authors predicted? Do you think disintermediation will be more common in the future?"

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The concept of disintermediation or the consolidation of supply chains, distribution channels and service chains due to the impact of disruptive technologies, including the Web, served as a powerful catalyst of business model creation in the past and the re-aligning of industries today (Ellis, 2003, 8). Many economic factors favoured disintermediation. These factors including the concept of utilitarian-based levels of pricing access, immediate price and availability for a given product being available globally on a 24/7 basis, and the flattening of distribution channels due to the anticipated pervasive adoption of the Web as the new selling engine global business (Shunk, Carter, Hovis, Talwar, 2007, 248). Disintermediation in fact never did reach the level of business model disruption that many had predicted, because the user experience online and trust were more critical to consumers than price, availability or transaction-based approaches to selling online. The failure of disintermediation to materialize shows that consumers value trust over transactions. This fundamental point underscores also the value distribution channels deliver, as value-added resellers, distributors, dealers and channel partners are the trusted advisors to their long-standing customers. Trust, paradoxically, proved to be a much more potent disintermediation force when it did not exist in value chains and distribution networks than the pure economic efficiency of transactions ever was. The intent of this analysis is to evaluate how the high technology industry illustrates disintermediation, the lessons learned from within that industry with regard to the factors of selective disintermediation, and also explore the dichotomy of disintermediation and value creation. The final section is on why disintermediation failed to live up to the hype.

2. How the High Technology Industry Illustrates Disintermediation

Financial analysts, industry experts, and many executives in high technology often cited Dell Computer Corporation as the lead in disintermediation-based strategies due to their financial success selling through direct channels (Mills, Camek, 2004, 714). It is ironic that during the period of time many industry analysts, experts and authored predicted disruptive and rapid disintermediation of the PC industry. This became such an industry concern that Compaq and Gateway (now both sold to HP and Acer respectively) initiated their own online initiatives and eventually failed at them. Compaq, who tried selling PCs online, created a firestorm literally overnight with this strategy. It was a complete failure. Gateway, who was Dell's largest competitor in the home PC market, chose to invest not only entirely in direct selling to consumers over the Web, they also created a direct sales force into businesses, and invested heavily in their own line of stores through the U.S. And Europe (Shunk, Carter, Hovis, Talwar, 2007, 248). It is interesting to note that the beginning of the series of decisions that eventually led to both Compaq and Gateway losing market share and trust of their customer base was when they chose to believe in disintermediation and took action on it. Paradoxically appealing to the economic judgment of their customers they neglected to invest heavily in building trust instead, and failed as a result.

2.1.

Lessons from the Selective Disintermediation of High Technology Industries

The lessons learned from disintermediation in the high technology industry underscore that each member of the supply chain, distribution channels, service chains and value chains play a critical role in delivering not just the product but also the experience a customer expects. Assuming disruptive disintermediation as valid can only be proven when there are trust "deficits" or negative forces at work in a value chain. As any business cannot tolerate that lack of trust anywhere it how it sources, buys, creates, sells or services products or services, whatever source of distrust is removed quickly to not harm operations. For the dire disintermediation forecasts of the mid-1990s to be true during the massive run-up of Internet dot coms, there would have had to be rampant distrust throughout value chains. The levels of distrust would have been so acute that it was more efficient for a manufacturer to go directly to the consumer and save the costs of ensuring compliance to order requirements, payment levels and customer service levels (Datta, Chatterjee, 2008, 26).

Instead, the Internet proved to be a very disruptive force in supply chains, delivering much greater insight and intelligence into how suppliers, buyers, manufacturers, distribution channel partners, and service providers could work more efficiently with one another. A critical lesson learned is that disintermediation does not revolve around consumer transactions; it does revolve around synchronization of supply chain partners, demand management from distribution channels, and greater accuracy to customer expectations.

3.

The Dichotomy of Disintermediation and Value Creation

One of the primary factors that many financial analysts, industry analysts and authors defined as the primary criterion for disintermediation was the accuracy, speed and cost reduction that online selling direct to customers would bring (Andonova, 2003, 285). The reasoning was that from a purely economically driven standpoint, consumers would have a nearly utilitarian level of access to all pricing, availability, product feature comparison and product review content, encompassing both products and services (Clemons, Hitt, Gu, Thatcher, Weber, 2002, 85). The thought process was that retailers offered little in the way of this new utilitarian vision of transactions online, and did not account for much of an influence on transactions, especially those that are for commodity-class products (Shunk, Carter, Hovis, Talwar, 2007, 248). The assumption that minimized the value of retailers in multi-tier, multichannel selling networks proved to be erroneous and ironically showed how critical the aspects of creating long-term trust and relationships with customers were (Palmatier, Dant, Grewal, Evans, 2006, 1).

3.1. Disintermediation Fails When Trust Matters in a Customer Relationship

The dichotomy of disintermediation vs. value creation became apparent as online toy retailers quickly found during their first full season of selling entirely online. Toy's R Us attempted to disintermediate their entire channel, and quickly found how just how critical of a role retailers played in managing the shopping experience, evenly distributing product availability across consumer markets, and most critical of all, handling returns. Attempts at disintermediating the role of channel partners, resellers, and most critical of all, retailers, was a resounding failure because it took the most critical sources of trust consumers had out of the buying process (Ramsey, Ibbotson, Mccole. 2008, 53).

During the period of time when the apex of hype was reaching nearly a crescendo pitch, entire business models were being created predicated on the power of disintermediation to completely disrupt markets and create entirely new market opportunities (Bull, 2010, 94). Of the massive overhang of venture capital invested in start-ups whose entire purpose was to re-order supply chains, distribution channels, and revolutionize value chains, one could find ingenious and creative approaches to gaining customer loyalty under the faulty assumption that pure economic efficiency and price ubiquity. Ironically these business models crashed and failed because they lacked the most essential ingredient of any successful customer-driven business, and that was creating a unique highly differentiated and valuable customer experience.

There was also the critical issue of trust. When retailers went en masse to online storefronts, attempting to shutter their physical locations, their internal supply chain operations could not scale quickly enough to deal with the demands placed on systems accustomed to dealing with aggregated, not individual, demand. The result was costly chaos and a recognition that the user experience and trust from consumers mattered much more than the speed of a transaction alone. Information technology can act as a disruptive force on a process but can never replace or supplement trust between people (Mandersheid, 2005, 5). The era of dotcoms that was in large part predicated on disintermediation also concentrated on compensating for the lack of personal interaction with significant increases in marketing spending as well (Rowley, 2002, 248). This second lesson learned from disintermediation-based business models that no amount of marketing spending, even an Initial Public Offering (IPO) level of cash generated, could ever compensate for a lack of trust and experience with a brand. Paradoxically the disruptive innovation of the Internet did not over the last decade and a half lead to faceless, utilitarian and highly automated transactions. It has led to a new era of accountability, authenticity and trust as predicated by social networks today. Comparing the 1997 -- 2000 timeframe to today (2011) the level of authenticity, transparency and trust through social networks seems completely the opposite of what disintermediation was intended to accomplish (Bernoff, Li, 2008, 38). It is as if disintermediation was a crucible that the Internet as a disruptive technology had to pass through in order to find it is far more disruptive and value use as enabling social connections and communications platform globally. While business managers, CEOs and company executives worried that they would be missing out on the next great revenue producing opportunity if they did not find a way to disintermediate their closest stakeholders and drive down costs, the greatest disruptive force the of the Internet has paradoxically been one that forces the issue of authenticity, transparency and trust. That irony is not lost on many of the high technology executives who at one time advocated disintermediating their entire dealer channel and taking their largest customers direct only to discover that trust is the greatest catalyst of efficient transactions of all (Smith, Manna, 2004, 377, 378).

4.

Why Disintermediation Failed to Live Up to the Hype

Before discussing the reasons why disintermediation failed to live up to the hype associated with it, there are exceptions that need to be taken into account. The first is in those industries that have undifferentiated supply chains and where price and availability alone are the only differentiators, disintermediation often takes hold. Such is the case with the Indian tea market, and many sectors of the consumer electronics industries that sell on a commodity-based strategy. These are the industries most susceptible to disintermediation as the middle tier of the distribution channels don't deliver that much value-add to the sale of a product that competes just on price or being in stock or not (Dutta, Sarmah, Goyal, 2010, 531). A second area where disintermediation also occurs is in the area of services where the Internet can provide the replacement of advisor, yet the brand supporting this initiate must have earned credibility and trust to be seen as viable to consumers (McCubbrey, Taylor, 2005, et.al.). Disintermediation of the travel industry has become pervasive due to online brands becoming more trusted and seen as more convenient on a 24/7 basis compared to travel agents (Law, 2009, 770). The disintermediation of travel agents has at its basis the convenience factors, supplanted and strengthened with trust in the brands themselves. With these areas of disintermediation in mind, the factors that led to disintermediation overall failing to completely reorder and disrupt supply chains are next analysed.

4.1.

Trust and the Selling Process

The more complex the user's needs are, the more challenging the products or services are to create, the greater the need for having a trusted advisor present in defining how to create viable and stable solutions to these problems. Examples of these types of needs are found in the aerospace and defence industry, where the development, specifying and manufacturing of products is often highly customized to specific needs (Rossetti, Choi, 2008, 507). This approach to manufacturing is often called engineer-to-order, and leads to a product being produced that is unlike any other in the world. Extreme examples of this including the landing gear on a spacecraft or the shielding for the U.S. Space Shuttle. These products require an incredibly complex supply chain that is often governed by specific compliance requirements to military standard specifications as well (Rossetti, Choi, 2008, 507). In this type of supply chain scenario, trust wins over price or availability, and expertise is crucial for the success of the program. The disintermediation of the aerospace and defense industry certainly is happening in the less differentiated and commodity-based products yet will never influence the more complex engineer-to-order areas where trust and expertise is as important as the product itself (Rossetti, Choi, 2008, et.al.). The concept of the trusted advisor, which has been discussed so much by professional services firms globally as part of their unique value proposition, has merit as a defense against commoditization and disintermediation. The greatest value any supplier can provide is knowledge and expertise of how to interpret customers' problems and develop workable solutions. When customers have this level of expectation from a supplier, manufacturer or service provider, this need for expertise is an impenetrable defense against disintermediation. This is where the entire argument of en masse disintermediation in the technology industry fell apart, as many industry analysts incorrectly characterized the entire industry as one that is centered on price and availability -- missing the trusted advisor roles so critical for configuring high-end servers, workstation and entire networks (Smith, Manna, 2004, 376). No Chief Information Officer (CIO) will ever buy a massive, expensive company network entirely online. That need for expertise that connotes trust was far more powerful than many of the industry analysts, authors and pundits had predicted. Trust now dominates the selling process, so much so that every social network has a series of metrics for evaluating the trustworthiness of anyone offering products or services online (Bernoff, Li, 2008, 38, 39). The need for trust will always win over the economics of disintermediation, especially in very complex, expensive and mission-critical systems and components, which are commonplace in the aerospace and defense industry (Rossetti, Choi, 2008, 507).

4.2.

Revenue Follows Knowledge and Accuracy Not Transaction Brokers

The travel industry learned the hard way that expertise, knowledge, insight and personal service is what customers want instead of a transaction agent. If one were to join a group of businessmen on a transatlantic flight from the UK to the U.S. during the mid-1990s the talk would inevitably turn to the bartering, cajoling and at times use of formal authority to get the flight they needed to arrive in time to get a decent amount of sleep before their meetings (McCubbrey, Taylor, 2005, et.al.). Travel agents had become the gatekeepers for the most desirable flights and hotels, the anointed ones who could deliver hotel rooms under special discounts in four-star hotels at two star prices, and could make a traveling executive's life heaven or hell on the road (Law, 2009, 772). The travel agent had become an extension of the travel companies they represented and had lost sight of the customer. A revolution was brewing and the business travellers globally had been long overdue to exercise the power of purchasing to choose alternatives to the gatekeepers in their companies who routed them through impossible travel itineraries to save only a fraction of the fare. The fallacy of looking at the travel industry as disintermediating the travel agent completely misses this point; the real revolution was one of trust and customer experience (McCubbrey, Taylor, 2005, et.al.). When Expedia emerged and other online travel agencies did giving the customer the freedom to define their own itineraries and create entire travel schedules below the cost of travel agendas, a revolution was on (McCubbrey, Taylor, 2005, et.al.). Now this is not an economic revolution, it is a customer service one. There is a big difference. The fact that travel agents were so quickly disintermediated is a sad mile marker in the history of electronic commerce. It should be remembered as the moment when customers chose to use disintermediation as a means to wrestle control over their travel schedules again and remove travel agents who delivered little value. The bottom line of this example is that disintermediation happens when companies revert to controlling their customers through transactions rather than serving them with knowledge and expertise. Disintermediation had become a weapon of change in the hands of customers, and Expedia and other start-ups were happy to equip them with the electronic commerce tools they needed to gain their freedom.