Reintermediation describes the reintroduction of a supply chain intermediary between producers and consumers.
Deliveroo created a more efficient supply chain for restaurants that were previously handling their own food deliveries. Reintermediation in the food delivery context has created a new market for eateries that found the cost of food delivery prohibitive.
Companies such as Autobytel started by providing general information about product categories and then moved into offering ancillary services that a manufacturer would normally handle. Amazon also uses tailored product recommendations to make the process of purchasing through an intermediary more attractive to consumers.
Aspect
Explanation
Definition
Reintermediation is a business strategy that reintroduces intermediaries or middlemen into a value chain or supply chain, often in response to market or technological changes. It contrasts with disintermediation, where intermediaries are eliminated. Reintermediation aims to add value, enhance distribution, or address new customer needs by reintroducing intermediaries.
Key Concepts
– Intermediaries: Third-party entities or businesses that facilitate transactions, distribution, or communication between buyers and sellers. – Value Addition: The goal of reintermediation is to bring value back into the process through intermediaries. – Market Dynamics: Changes in the market, technology, or customer preferences can drive the need for reintermediation. – Distribution Channels: Reintermediation often involves optimizing distribution channels for efficiency. – E-commerce: The rise of e-commerce has led to both disintermediation and reintermediation strategies.
Reasons
– Value Addition: Reintermediaries can provide value-added services such as logistics, quality control, or specialized knowledge. – Efficiency: Reintroducing intermediaries can optimize distribution or reduce transaction costs. – Complexity: In complex or fragmented markets, intermediaries can simplify interactions. – Regulatory Compliance: Compliance requirements may necessitate involving intermediaries. – Customer Experience: Intermediaries can improve customer service and support.
Examples
– Online Marketplaces: E-commerce platforms like Amazon act as intermediaries connecting buyers and sellers. – Travel Agencies: Online travel agencies reintroduce intermediaries for booking flights, hotels, and tours. – Freight Forwarders: Shipping and logistics companies facilitate global trade by managing the movement of goods. – Financial Advisors: In financial services, intermediaries provide investment advice and wealth management. – Blockchain: Some blockchain applications reintroduce trust intermediaries for secure transactions.
Advantages
– Expertise: Intermediaries often have specialized knowledge or capabilities. – Efficiency: They can streamline processes and reduce costs. – Market Reach: Intermediaries can extend market reach and access to customers. – Risk Management: They may provide risk mitigation or insurance services. – Customer Service: Enhanced customer support and satisfaction are potential benefits.
Challenges
– Costs: Adding intermediaries can increase costs and reduce profit margins. – Dependency: Overreliance on intermediaries can create vulnerabilities. – Competitive Pressure: The competitive landscape may require constant innovation to stay relevant. – Disruption: Emerging technologies can disrupt reintermediation strategies. – Regulatory Compliance: Compliance with industry regulations and standards is crucial.
Implications
Reintermediation is a strategic choice made by businesses to adapt to changing market conditions or customer preferences. It can result in a more efficient and competitive value chain. However, businesses must carefully assess the costs and benefits to ensure it aligns with their objectives and market dynamics.
Reintermediation consists of the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.
Almost any company that wants to sell direct-to-consumer (D2C) can now do so thanks to the near-total prevalence of the internet.
Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.
The D2C model is attractive to many companies since removing the intermediary increases profits and provides greater consumer data access.
However, this scenario does not always play out in practice.
Cutting out the middleman is often associated with a whole new set of problems for the business.
Some find the fulfillment of minimal orders problematic, while others must take on customer service duties that were once the purview of the retailer.
Reintermediation describes the reintroduction of a supply chain intermediary between producers and consumers.
It is mainly used by companies that, for whatever reason, decide that the D2C approach is not for them.
Other businesses use reintermediation to reassemble buyers, sellers, and intermediaries in new and profitable ways.
The rest of this article will be devoted to discussing some specific reintermediation examples.
Case study: Amazon’s last-mile delivery
Last-mile delivery consists of the set of activities in a supply chain that will bring the service and product to the final customer. The name “last mile” derives from the fact that this usually refers to the final part of the supply chain journey, yet this is extremely important, as it’s the most exposed, consumer-facing part.
As Amazon tried to figure out last-mile delivery, the company might also, over time, disintermediate the old delivery industry, which suddenly might be cut out from the supply chain.
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all can produce products that customers want.
As this process happens and Amazon defines the new market, new intermediaries that have learned to play according to Amazon rules will form.
Creating a whole new intermediary
For instance, as Amazon has been figuring out the last-mile problem, it also approached it with a new program, launched in 2018, called Delivery Service Partner.
Or simply put, a startup that gets helped by Amazon to become an independent contractor (under the rules of Amazon) that delivers packages for the company.
Thus, Amazon disintermediates the old carriers and builds up a new system, which is comprised of new intermediaries.
Yet those will follow Amazon’s rules and policies.
The tension between intermediation and disintermediation
The evolution of the Internet moves from phases of disintermediation, which is extremely helpful to remove old logic that does not work anymore in current market conditions, to establish new systems.
As those new systems are established, reintermediation might occur for several reasons.
First, it might be the critical player, once disintermediating, now incentivizing reintermediation, to gain more control over the market.
Second, as the market adjusts to this new reality, new intermediaries learn the logic of this new market and try to capture some value within the supply chain.
Deliveroo is a British online food delivery company founded by Greg Orlowski and Will Shu in 2013. Shu developed the platform in response to a lack of high-quality food delivery in London.
Deliveroo makes money by collecting 25-45% of every order it facilitates. It also charges delivery fees and onboarding fees for restaurants that wish to be featured on the platform.
Deliveroo for Business is a service designed for corporate clients needing to order food in bulk. The company also charges a higher commission to businesses that utilize a network of digital kitchens to process orders.
Online food delivery company Deliveroo partners with restaurants across thousands of cities around the world.
In so doing, it manages the entire process from pickup at the restaurant to delivery at the customer’s door.
Deliveroo created a more efficient supply chain for restaurants that were previously handling their own food deliveries.
Reintermediation has created a new market for eateries that found the cost of delivering food themselves prohibitive.
Without Deliveroo, in other words, the restaurant would be required to invest in vehicles, drivers, insurance, and logistics planning, among many other things.
Deliveroo and many similar companies have made the supply chain more efficient through intermediation.
From the point of view of the restaurant, food delivery is now no different to a customer picking up an order from their premises.
Autobytel.com
Some intermediaries provide general information about various product categories and how they meet different consumer needs.
Web-based car sales intermediary Autobytel started with searchable information about vehicles based on several criteria and also allowed consumers to locate dealerships that sold the car they wanted.
The company has now transitioned into selling ancillary services such as servicing, insurance, and finance to build long-term relationships with customers.
In the D2C model, these are services once exclusively offered by the dealership or car manufacturer.
Amazon has a diversified business model. In 2023, Amazon generated nearly $575 billion in revenues while it posted a net profit of over $30 billion. Online stores contributed over 40% of Amazon revenues. Third-party Seller Services and Physical Stores generated the remaining. Amazon AWS, Subscription Services, and Advertising revenues play a significant role within Amazon as fast-growing segments.
Amazon is also a significant proponent of intermediation.
The Amazon.com homepage features an intuitive user interface that provides customized product recommendations.
This is paired with similarly tailored email marketing and proprietary product fulfillment systems.
Amazon understands that consumers purchase many of the products it sells directly from the manufacturer and in fewer steps.
To maximize its success as an intermediary, the intuitive user interface and personalized product recommendations shorten the time consumers spend finding the correct item.
In essence, Amazon is creating a cohort of users dependent on its product recommendations to streamline the purchase process and discover new products they may be interested in.
Traditional manufacturers in the D2C model have been slow to replicate this level of detail.
Amazon generated over half a trillion dollars in revenue in 2023, of which $231.87B from online stores, over $140.05B from third-party seller services, $90.76B from AWS, $46.9B from advertising, $40.21B from subscription services, $20.03B billion in physical stores, and $4.96B from other sources.
Key Highlights:
Reintermediation Defined: Reintermediation is the process of reintroducing intermediaries into a supply chain that had previously been removed or creating new intermediaries that previously didn’t exist. This often occurs when market dynamics change and new players emerge within the supply chain.
Business Strategy Implications: Reintermediation can be employed as a business strategy when companies decide that the direct-to-consumer (D2C) approach isn’t suitable for them. Some businesses use reintermediation to create new and profitable ways of connecting buyers, sellers, and intermediaries.
Amazon’s Last-Mile Delivery: Amazon’s exploration of last-mile delivery provides an example of reintermediation. As Amazon revolutionizes last-mile delivery, it might disintermediate old delivery methods and create a new system of delivery intermediaries that operate according to Amazon’s rules.
Creating New Intermediaries: Amazon’s “Delivery Service Partner” program, launched in 2018, helps startups become independent contractors that deliver packages for Amazon. This process creates a new set of intermediaries within Amazon’s ecosystem.
Tension Between Intermediation and Disintermediation: The evolution of the internet involves phases of disintermediation followed by reintermediation as new systems are established. The tension between these concepts drives the evolution of markets and business models.
Case Studies: Examples like Deliveroo and Autobytel demonstrate how reintermediation can create efficient supply chains and introduce new services to customers that were once exclusively provided by other players in the market.
Amazon’s Approach: Amazon effectively uses intermediation to create a user-friendly interface and personalized product recommendations, streamlining the purchase process for consumers. This fosters dependency on Amazon’s product recommendations, enhancing its position as an intermediary.
Related Frameworks, Concepts, Models
Description
When to Apply
Disintermediation
– The removal of intermediaries in a supply chain. – Allows producers to directly interact with customers.
– Apply when aiming to reduce costs. – Improve efficiency by eliminating middlemen.
Intermediation
– The process of using intermediaries to provide services or products. – Adds value through expertise or aggregation.
– Use when there is a need for expertise. – Aggregation of services. – Reduction of transaction costs.
Platform Business Model
– Creates value by facilitating exchanges between two or more interdependent groups. – Usually involves consumers and producers.
– Implement when looking to create or operate a marketplace or digital platform.
Value Chain Analysis
– A strategy tool used to analyze internal firm activities. – Recognizes which activities are the most valuable (source of cost or differentiation advantage).
– Utilize when aiming to understand and optimize each step in the production or delivery process. – Gain a competitive edge.
Network Effect
– Phenomenon where increased numbers of participants improve the value of a good or service.
– Leverage when building products or services that become more valuable as more people use them (e.g., social networks, marketplaces).
Supply Chain Management (SCM)
– Management of the flow of goods and services. – Includes all processes that transform raw materials into final products.
– Apply in complex production environments. – Optimize logistics, reduce costs, and improve efficiency.
Channel Strategy
– Method by which a company directs its marketing and distribution efforts to reach customers.
– Use when determining the best way to reach customers. – Through direct or indirect channels.
Ecosystem Strategy
– Involves the coordination of various independent entities. – Creates a more robust and comprehensive offering.
– Implement when operating in or creating a network of interconnected businesses. – Offer complementary products or services.
Customer Relationship Management (CRM)
– Technology for managing all company relationships and interactions with current and potential customers.
– Use to improve business relationships. – Streamline processes, and improve profitability. – Understand and manage customer interactions.
Multi-Sided Market
– A market where multiple distinct user groups interact through a single platform. – The platform provides value to each group.
– Apply when facilitating interactions between different user groups. – Groups benefit from each other’s presence (e.g., ride-sharing apps, online marketplaces).
The idea of a market economy first came from classical economists, including David Ricardo, Jean-Baptiste Say, and Adam Smith. All three of these economists were advocates for a free market. They argued that the “invisible hand” of market incentives and profit motives were more efficient in guiding economic decisions to prosperity than strict government planning.
Positive economics is concerned with describing and explaining economic phenomena; it is based on facts and empirical evidence. Normative economics, on the other hand, is concerned with making judgments about what “should be” done. It contains value judgments and recommendations about how the economy should be.
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Asymmetric information as a concept has probably existed for thousands of years, but it became mainstream in 2001 after Michael Spence, George Akerlof, and Joseph Stiglitz won the Nobel Prize in Economics for their work on information asymmetry in capital markets. Asymmetric information, otherwise known as information asymmetry, occurs when one party in a business transaction has access to more information than the other party.
Autarky comes from the Greek words autos (self)and arkein (to suffice) and in essence, describes a general state of self-sufficiency. However, the term is most commonly used to describe the economic system of a nation that can operate without support from the economic systems of other nations. Autarky, therefore, is an economic system characterized by self-sufficiency and limited trade with international partners.
Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.
Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.
An oligopsony is a market form characterized by the presence of only a small number of buyers. These buyers have market power and can lower the price of a good or service because of a lack of competition. In other words, the seller loses its bargaining power because it is unable to find a buyer outside of the oligopsony that is willing to pay a better price.
The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage. Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.
State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.
The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.
The paradox of thrift was popularised by British economist John Maynard Keynes and is a central component of Keynesian economics. Proponents of Keynesian economics believe the proper response to a recession is more spending, more risk-taking, and less saving. They also believe that spending, otherwise known as consumption, drives economic growth. The paradox of thrift, therefore, is an economic theory arguing that personal savings are a net drag on the economy during a recession.
In simplistic terms, the circular flow model describes the mutually beneficial exchange of money between the two most vital parts of an economy: households, firms and how money moves between them. The circular flow model describes money as it moves through various aspects of society in a cyclical process.
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Rational choice theory states that an individual uses rational calculations to make rational choices that are most in line with their personal preferences. Rational choice theory refers to a set of guidelines that explain economic and social behavior. The theory has two underlying assumptions, which are completeness (individuals have access to a set of alternatives among they can equally choose) and transitivity.
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The term “knowledge economy” was first coined in the 1960s by Peter Drucker. The management consultant used the term to describe a shift from traditional economies, where there was a reliance on unskilled labor and primary production, to economies reliant on service industries and jobs requiring more thinking and data analysis. The knowledge economy is a system of consumption and production based on knowledge-intensive activities that contribute to scientific and technical innovation.
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The bottom of the pyramid is a term describing the largest and poorest global socio-economic group. Franklin D. Roosevelt first used the bottom of the pyramid (BOP) in a 1932 public address during the Great Depression. Roosevelt noted that – when talking about the ‘forgotten man:’ “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power.. that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”
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Market fragmentation is most commonly seen in growing markets, which fragment and break away from the parent market to become self-sustaining markets with different products and services. Market fragmentation is a concept suggesting that all markets are diverse and fragment into distinct customer groups over time.
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Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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