disintermediation

What Is Disintermediation? Disintermediation In A Nutshell

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.

How the web disintermediated the old world

“Your margin is my opportunity,” this quote apparently attributed to Jeff Bezos, explains well the process of disintermediation that has been going on with the advent of the web.

One of the core premises of the web was the concept of decentralization and as a result intermediation. Companies like Amazon, Google, Facebook, Netflix, Uber, Spotify, Shopify and many other startups born in the web era, have all grown with the purpose of dismantling the old distribution pipelines, thus unlocking distribution.

Amazon has been disintermediating a whole supply chain for e-commerce and now it’s looking into last-mile delivery to cut out from the supply chain traditional large carriers (DHL, UPS, FedEx) to realize its dream of customer obsession.

Netflix has been for over a decade disintermediating the entertainment industry.

Google and Facebook unlocked branding and marketing at first. In the previous era, if you wanted to get brand exposure you had to go through the classical ad agency or a set of intermediaries that kept tight control over the industry and their marketing budgets.

As Google first, Facebook later, came up with a massive, mostly automated digital advertising machine, they first targeted a different segment of the ad industry (not that interesting to those who were used to the old way of advertising).

Indeed, Google itself proselytized a set of new marketers who learned to believe in the only god of performance-based marketing. No more branding or marketing, done without data, measuring, and clear ROI.

The engineering approach of Google first, Facebook later, made the whole deal look promising to those companies (especially startups) who didn’t have the budgets to invest in TV advertising.

Those digital marketers started to look for what we might define last-mile advertising, where it gets easy to track the click from and therefore measure the impact of marketing.

With that simple, yet powerful promise Google and Facebook created a digital advertising industry that, initially grabbed those who were all about performance, and therefore didn’t need an ad agency.

And later on, digital advertising would transition and become much more complete. As those companies evolved, both brand and performance advertising on Google and Facebook were covered up, and this process of disintermediation brought to the end of the traditional ad agency.

Yet, all in all, as those companies turned into tech giants, it started – I argue – a process of reintermediation. Before going there, let’s also look at the process of intermediation that happened after the consolidation of a new era, turning mature.

Reintermediation

reintermediation
Reintermediation consists in 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.

As companies like Google and Facebook disintermediated the advertising industry. At the same time, the market has been adjusting to the new industry created by those players.

As marketing itself got redefined through the lenses of data and measurement, once ad agencies turned into digital marketing agencies. Today the whole industry of consultancy companies born as a result of the SEO/SEM and SMO/SMM industries has seen the rise of digital agencies managing budgets for clients.

So after all, after the first stage of actual disintermediation. The market adjusted, and the dream of disintermediation, transformed in something else.

Enter the gatekeeper’s hypothesis

gatekeepers-model
In a world driven by tech giants that locked-in the digital distribution pipelines to reach billions of people across the globe, the gatekeeper hypothesis states that small businesses will need to pass through those nodes to reach key customers. Thus, those gatekeepers become the enablers (or perhaps deterrent) for small businesses across the globe.

Those once startups turned gatekeepers. The old markets that crashed under the pressure of new industries, also matured. That might have created a process of dominance, where winner-take-all effects took over.

And markets once fragmented by many intermediaries, turned into new markets primarily dominated by a few central players, setting the rules of the game. According to what I called the “Gatekeeping Hypothesis” we sort of went back to an era of blocked distribution by a few key players, with some critical differences.

First, this time algorithms defined the rules to follow, even though at central levels, a few key people (usual engineers following the executives’ instructions made those rules in the first place).

Second, this era is primarily customer-centered. Where in the past, it was all about keeping a tight control on the supply chain and distribution, so that over time consumers wold get used to whatever it got sold to them (standardized mass-marketing helped indeed). To an era where those tech giants are stubborn and obsessed with customer experience.

When Google sets the rules for websites to follow, it does that by keeping as North Start, the user experience (of course defined a la Google), and those who do not conform to that are out from the walled garden.

Third, consolidation and asymmetry took over. Where many more intermediaries might have controlled fragmented industries. The new players learned that domination is what matters and they set for it.

In addition, most processes are now asymmetric. When the user gives data to Facebook, the value it gets back is much lower compared to what Facebook can and will do with that data. Both in terms of usage and monetization. In short, Facebook will be way better by getting the data of the user, as this will add up to its network effects. Compared to what the user gets back (some form of entertainment).

Therefore, winner-take-all effects created a few, super large players that became the main intermediaries.

Super platforms and super gatekeepers

horizontal-vs-vertical-gatekeepers

Let’s add to that, those gatekeepers have been stretching their tentacles to cover more and more parts of the user experience, thus generating potential for the rise of super gatekeepers.

Blockchain and the renewed dream of decentralization at scale

blockchain-economics

There isn’t a single way for the web to evolve. And renewed dreams of scaled decentralization took place with the Blockchain and its potential commercial applications. Whether this will be a permanent effect, we can’t be sure.

However, for one thing, Blockchain might get us to the rise of a new form of organization, something that goes beyond the classic corporation and take the form of a super, decentralized company, made of many companies combined, and all joining a shared protocol.

Key takeaways

  • Disintermediation is the process of cutting out intermediaries from the supply chain. The web has been a critical driver of this process, by disintermediating old industries to create whole new market opportunities for all.
  • The wave of disintermediation is still going on (see Amazon last-mile). At the same time as those companies created new markets that are becoming more mature, a process of reintermediation (where new intermediaries are born as a result).
  • As former startups, turned tech giants, those became gatekeepers and winner-take-all/intermediaries at large scale.
  • The Blockchain brings back the dreams of disintermediation and decentralization at large scale. Whether this will happen, be permanent we don’t know yet, and can’t be sure either.

Other business phenomena of the web 2.0 era

Let’s look also at a few other phenomena enabled by the web.

Business Platforms

business-platform-theory

In the digita era, business platforms have become the key foundation for massive entrepreneurial ecosystems to form, and therefore the development of products used by a large consumer base.

The advent of business platforms has taught us that to scale up a product at mass-consumption level, it’s not enough anymore to have the physical side (hardware).

Instead, the non-physical, comprising the software, and all the other applications built on top of it become critical. In short, while hardware and software are critical to build a solid foundation, those are usually highly centralized.

Instead, there is another part, where companies act more like governments, setting the policies and rules for the platform. But then the platform itself is left to develop.

The products made as a result of these platforms enhance the core products offered by the organization (your iPad would be worth much less without apps).

Customer-Centrism and Customer Obsession

customer-obsession
Customer obsession goes beyond quantitative and qualitative data about customers, and it moves around customers’ feedback to gather valuable insights. Those insights start by the entrepreneur’s wandering process, driven by hunch, gut, intuition, curiosity, and a builder mindset. The product discovery moves around a building, reworking, experimenting, and iterating loop.

In this era, customers got at the center of the business stage. They became the focus for the development of products in the first place. Indeed, at an entrepreneurial level, today, you first validate the market, understand if people really want something, then go on and build it.

At the same time, like Amazon taught us, customer obsession also takes the form of random discovery, where the company audacious enough to push products that customers don’t even know they want, yet, also win.

Decoupling

decoupling
According to the book, Unlocking The Value Chain, Harvard professor Thales Teixeira identified three waves of disruption (unbundling, disintermediation, and decoupling). Decoupling is the third wave (2006-still ongoing) where companies break apart the customer value chain to deliver part of the value, without bearing the costs to sustain the whole value chain.

The decoupler learned how to look at the whole customer value chain, only to focus on one core aspect of it, to enable a whole new experience, based on convenience, in terms of money, time and effort.

The new experience designed by the decoupler breaks apart the customer value chain, thus identifying and offering only the most valuable part.

Digital Platforms

digital-business-models
A digital business model might be defined as a model that leverages digital technologies to improve several aspects of an organization. From how the company acquires customers, to what product/service it provides. A digital business model is such when digital technology helps enhance its value proposition.

Digital platforms and digital business models, from e-commerce, to on-demand, subscription-based model, freemium, open source and more, have all become natural players in the web era.

Flywheels

amazon-flywheel
The Amazon Flywheel or Amazon Virtuous Cycle is a strategy that leverages on customer experience to drive traffic to the platform and third-party sellers. That improves the selections of goods, and Amazon further improves its cost structure so it can decrease prices which spins the flywheel.

In this era, flywheels become the key growth component of platform business models.

Network Effects

network-effects
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Network effects instead become critical to enable the platform to scale, and as it does become more valuable. In short, where in the past we talked about economies of scale, in this era, we talk about network effects.

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Where platform business models enjoy network effects. The opposite is true. In the physical world, where this phenomenon is known more as diseconomies of scale.

In the digital business world, when the network becomes too busy (overcapacity), or it scales too much, negative network effects can pick up. Thus, redounding the value of the overall network.

Unbundling

unbundling
Unbundling is a business process where a series of products or blocks inside a value chain are broken down to provide better value by removing the parts of the value chain that are less valuable to consumers and keep those that in a period in time consumers value the most.

Many of the companies that entered those new spaces, and dominated them, started out as unbundler. They took an existing “pre-packaged experience” from the previous era, and they only offered the most valuable part.

In short, they surfed the giants of the previous era. And as they did they gained massive growth.

As new companies come into the market and supplant incumbents with an unbundling process, they tend to consolidate their distribution, thus bundling things up to offer an end-to-end experience and gain as much control possible over the customer journey.

When this process is mature, other companies, with a different mindset, willing to take the best of that experience and unbundle it, might gain traction at expense of the incumbent.

Value Innovation

blue-ocean-strategy
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

Innovators in the digital age, have been able to innovate by breaking down the wall between cost and value. This is at the core of the Blue Ocean Strategy.

On FourWeekMBA, I also advocate for a Blue Sea approach, where a minimum viable audience, becomes the North Star to build a valuable small digital business.

Vertical Integration (in the bits world)

vertical-integration
In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through consumers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.

Over time, once small players that have gained more and more market shares in their industry, also expanded in adjacent markets. Thus, controlling more parts of the journey for potential customers.

For instance, where Google has been able for decades, to only find relevant information for users, and it then sent them toward whatever site it was available on the web.

Google integrated more and more products to its search engine to enhance the user journey and create an end-to-end experience, and at the same time by integrating its supply chain, to gain control over the whole process.

A phenomenon known for decades to the physical world, has become also widely applied to the digital world.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here