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Disintermediation is the removal of
intermediaries An intermediary (or go-between) is a third party that offers intermediation services between two parties, which involves conveying messages between principals in a dispute, preventing direct contact and potential escalation of the issue. In law ...
in
economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...
from a
supply chain In commerce, a supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then final products to customers through a distribution system. It refers to the network of organizations, people, activ ...
, or "cutting out the middlemen" in connection with a transaction or a series of transactions. Instead of going through traditional distribution channels, which had some type of
intermediary An intermediary (or go-between) is a third party that offers intermediation services between two parties, which involves conveying messages between principals in a dispute, preventing direct contact and potential escalation of the issue. In la ...
(such as a distributor,
wholesaler Wholesaling or distributing is the sale of goods or merchandise to retailers; to industrial, commercial, institutional or other professional business users; or to other wholesalers (wholesale businesses) and related subordinated services. In ...
,
broker A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be con ...
, or
agent Agent may refer to: Espionage, investigation, and law *, spies or intelligence officers * Law of agency, laws involving a person authorized to act on behalf of another ** Agent of record, a person with a contractual agreement with an insuranc ...
), companies may now deal with customers directly, for example via the
Internet The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, p ...
. Disintermediation may decrease the total cost of servicing customers and may allow the manufacturer to increase
profit margins Profit margin is a measure of profitability. It is calculated by finding the profit as a percentage of the revenue. \text = = There are 3 types of profit margins: gross profit margin, operating profit margin and net profit margin. * Gross Pr ...
and/or reduce
price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...
s. Disintermediation initiated by consumers is often the result of high market transparency, in that buyers are aware of supply prices direct from the manufacturer. Buyers may choose to bypass the middlemen (wholesalers and retailers) to buy directly from the manufacturer, and pay less. Buyers can alternatively elect to purchase from wholesalers. Often, a business-to-consumer electronic commerce (B2C) company functions as the bridge between buyer and manufacturer. However manufacturers will still incur distribution costs, such as the physical transport of goods, packaging in small units, advertising, and customer helplines, some or all of which would previously have been borne by the intermediary. To illustrate, a typical B2C supply chain is composed of four or five entities. These are the supplier,
manufacturer Manufacturing is the creation or production of goods with the help of equipment, labor, machines, tools, and chemical or biological processing or formulation. It is the essence of secondary sector of the economy. The term may refer to ...
,
wholesaler Wholesaling or distributing is the sale of goods or merchandise to retailers; to industrial, commercial, institutional or other professional business users; or to other wholesalers (wholesale businesses) and related subordinated services. In ...
,
retailer Retail is the sale of goods and services to consumers, in contrast to wholesaling, which is sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturers, directly or through a wholesaler, and ...
and buyer.


History

The term was originally applied to the
bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...
ing industry in 1967; disintermediation occurred when consumers avoided the intermediation of banks by investing directly in securities (government and private bonds, insurance companies,
hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as ...
s,
mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICA ...
s and stocks) rather than leaving their money in savings accounts. The original cause was a U.S. government regulation ( Regulation Q) which limited the
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...
paid on interest bearing accounts that were insured by the
Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cr ...
. It was later applied more generally to "cutting out the middleman" in commerce, though the financial meaning remained predominant. Only in the late 1990s did it become widely popularized.


Impact of Internet-related disintermediation upon various industries

It has been argued that the Internet modifies the supply chain due to market transparency. Disintermediation has acquired a new meaning with the advent of the virtual marketplace. The virtual marketplace sellers like
Amazon Amazon most often refers to: * Amazons, a tribe of female warriors in Greek mythology * Amazon rainforest, a rainforest covering most of the Amazon basin * Amazon River, in South America * Amazon (company), an American multinational technolog ...
are edging out the middlemen. Direct sellers and buyers connect with each other because of the platform created by the virtual marketplace vendor. There is quid pro quo for the vendor for the use of the platform, else it would make no business sense to create such a platform. If the buyer, having connected with the seller, circumvents the platform and talks to the seller and does her deal directly with the seller, then the platform owner is unlikely to get her revenue share. This may be considered a new form of disintermediation.


Discussion

In the non-Internet world, disintermediation has been an important strategy for many
big box retailer A big-box store (also hyperstore, supercenter, superstore, or megastore) is a physically large retail establishment, usually part of a chain of stores. The term sometimes also refers, by extension, to the company that operates the store. The te ...
s like
Walmart Walmart Inc. (; formerly Wal-Mart Stores, Inc.) is an American multinational retail corporation that operates a chain of hypermarkets (also called supercenters), discount department stores, and grocery stores from the United States, headquarter ...
, which attempt to reduce prices by reducing the number of intermediaries between the supplier and the buyer. Disintermediation is also closely associated with the idea of just in time manufacturing, as the removal of the need for
inventory Inventory (American English) or stock (British English) refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation. Inventory management is a discipline primarily about specifying the sha ...
removes one function of an intermediary. The existence of laws which discourage disintermediation has been cited as a reason for the poor economic performance of
Japan Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the n ...
and
Germany Germany,, officially the Federal Republic of Germany, is a country in Central Europe. It is the second most populous country in Europe after Russia, and the most populous member state of the European Union. Germany is situated betwee ...
in the 1990s. However, Internet-related disintermediation occurred less frequently than many expected during the dot com boom. Retailers and wholesalers provide essential functions such as the extension of credit, aggregation of products from different suppliers, and processing of returns. In addition, shipping goods to and from the manufacturer can in many cases be far less efficient than
shipping Freight transport, also referred as ''Freight Forwarding'', is the physical process of transporting commodities and merchandise goods and cargo. The term shipping originally referred to transport by sea but in American English, it has been ...
them to a store where the consumer can pick them up (if the consumer's trip to the store is ignored). In response to the threat of disintermediation, some retailers have attempted to integrate a virtual presence and a physical presence in a strategy known as
bricks and clicks Omnichannel retail strategy, originally also known in the U.K. as bricks and clicks, is a business model by which a company integrates both offline (''bricks'') and online (''clicks'') presences, sometimes with the third extra ''flips'' (physica ...
.


Reintermediation

Reintermediation can be defined as the reintroduction of an intermediary between end users (consumers) and a producer. This term applies especially to instances in which disintermediation has occurred first. At the start of the Internet revolution, electronic commerce was seen as a tool of disintermediation for cutting operating costs. The concept was that by allowing consumers to purchase products directly from producers via the Internet, the product delivery chain would be drastically shortened, thereby "disintermediating" the standard supply model middlemen. However, what largely happened was that new intermediaries appeared in the digital landscape (e.g.,  Amazon.com and
eBay eBay Inc. ( ) is an American multinational e-commerce company based in San Jose, California, that facilitates consumer-to-consumer and business-to-consumer sales through its website. eBay was founded by Pierre Omidyar in 1995 and became ...
). Reintermediation occurred due to many new problems associated with the e-commerce disintermediation concept, largely centered on the issues associated with the direct-to-consumers model. The high cost of shipping many small orders, massive customer service issues, and confronting the wrath of disintermediated retailers and supply channel partners all presented real obstacles. Huge resources are required to accommodate presales and postsales issues of individual consumers. Before disintermediation, supply chain middlemen acted as salespeople for the producers. Without them, the producer itself would have to handle procuring those customers. Selling online has its own associated costs: developing quality websites, maintaining product information, and marketing expenses all add up. Finally, limiting a product's availability to Internet channels forces the producer to compete with the rest of the Internet for customers' attention, a space that is becoming increasingly crowded.


Examples

Notable examples of disintermediation include
Dell Dell is an American based technology company. It develops, sells, repairs, and supports computers and related products and services. Dell is owned by its parent company, Dell Technologies. Dell sells personal computers (PCs), servers, data ...
and Apple, which sell many of their systems direct-to-consumer—thus bypassing traditional retail chains, having succeeded in creating brands well recognized by customers, profitable and with continuous growth.


In the automotive industry

Tesla avoids using dealers as middlemen by offering their own outlets, which have only a few vehicles for display and test driving; customers complete their full purchase online. This approach allowed Tesla to raise auto gross profit by about 34%. This strategy also allows Tesla to control more of its customers' experience and build online community. Following Tesla's success, two other automotive brands,
Audi Audi AG () is a German automotive manufacturer of luxury vehicles headquartered in Ingolstadt, Bavaria, Germany. As a subsidiary of its parent company, the Volkswagen Group, Audi produces vehicles in nine production facilities worldwide. ...
and
General Motors The General Motors Company (GM) is an American Multinational corporation, multinational Automotive industry, automotive manufacturing company headquartered in Detroit, Michigan, United States. It is the largest automaker in the United States and ...
, decided to start trials of direct sales in 2012 and 2013 respectively.


See also

* Flat fee MLS — An example of disintermediation in the Real Estate industry. * Laiki agora - an example of disintermediation of agricultural foodstuffs in Greece * Outlet store * Social peer-to-peer processes * Direct-to-consumer


References

Notes'' Bibliography *Graham, Mark.
Warped Geographies of Development: The Internet and Theories of Economic Development
" ''Geography Compass'', (2) 2008. *Hawken, Paul. "Disintermediation: an economics buzzword that neatly explains a lot of the good that is going on." ''CoEvolution Quarterly'', Spring 1981, pp. 6–14. {{Uberisation Business models E-commerce Distribution (marketing) Supply chain management