Chapter 3: Disintermediation

Overview

The value proposition of technology is often determined not by the capabilities it enables, but by the rate at which those new capabilities are accepted by society and can be incorporated into everyday life or, in the case of business, into the processes that add value to its production. The implications of technology are typically not reflected in its initial value proposition but realized after it has been adopted by society and put to good use, as discussed in section 1.4. The initial business/consumer value proposition of the Internet and eCommerce technologies was the ability to directly connect consumers to manufacturers, effectively bypassing several layers of seemingly non-value-added intermediaries resulting in purchase price savings for consumers and a reduction in distribution cost for the manufacturer. However, manufacturers, distributors and consumers are now realizing that this technological phenomenon brings both market compression and channel expansion whose effects on the marketplace are not completely understood.

The first effect of the Internet on the market was its original value proposition, that of compression, in which consumers could eliminate intermediaries and place orders directly with producers. However, customers soon realized that traditional manufacturers were not prepared for this new way of buying and were, in reality, uneasy with a process that would alienate their existing distribution partners. Additionally, manufacturers who did venture into a cyberspace relationship with customers were often unaccustomed to the demands of retail customers, and their customer services departments were unprepared for the volume and intensity of customer inquiries. The compressive capabilities offered by the Internet may be, as discussed in section 1.2, ahead of the rate of acceptance not by consumers, but by venerable manufacturing organizations, who are finding it difficult to adapt to the new channel to market. This effect of the Internet coupled with market resistance did not eliminate intermediaries. However, it did result in a reassessment of the relationships between intermediaries and manufacturers and a realignment of technology strategies. The market compression caused by Internet technology brings:

• A reduction of process steps within the firm and with external partners

• A transfer of various aspects of customer service to the customer along with the associated costs. Self-service now means that the customer is spending their own time

• An aggregation and consolidation of data which can be used to develop the associative characteristics of information to support knowledge work.

The second effect that the Internet had on the market is that of channel expansion. The shortfalls in manufacturers’ ability to service vast numbers of retail customers and the inability of the existing distribution channels to adopt their systems quickly to the new medium brought about the introduction of new market entrants. These new entrants were small entrepreneurial organizations that did not have a legacy of business processes or pre-existing computer information systems. In effect, they were, to some extent, able to fill the niche opportunities caused by the shortfalls in the existing marketplace. These dot-com firms rose and fell rapidly not because of any quantum change in technology, but from a myriad of reasons discussed in numerous books and articles. The Internet’s channel expansive effect:

• Created new opportunities for firms excelling in customer services

• Established new firms willing to become highly focused niche intermediaries

• Caused existing firms to reassess their value proposition to customers.

That said, technology has now advanced to the point where it can fundamentally change not only the role of the intermediary, but the social contract of trust in an exchange of value. Organizations in industries that were early adopters of Internet technologies are now in various stages of restructuring, which was, in many cases, caused by the effects of disintermediation. This restructuring was promoted by Internet technologies, transforming them into a value network in which cells of competencies (represented by either an entire firm or department within a firm) offer a product or service that fills a market niche or the needs of a market segment. These cells of competencies are manifesting themselves as new market entrants, previous functions within financial services firms in connection with a niche market, joint ventures with technology firms and retail merchants, and co-opetition agreements with competitors to service market segments. Internet service providers (ISPs) and application service providers (ASPs) are examples of new market entrants supporting niche market opportunities. Successful ASPs and ISPs offer a simple and distinct value proposition: providing a business with a technology capability that is readily available, simple to acquire and offered by many competitors. The ASP value proposition offers:

• The use of shared infrastructure which reduces a customer’s operating cost

• Rapid time to market because the technology is already in place and is simply made available

• Flexible pricing based on fixed cost or transaction volume

• Little or no upfront capital investment in hardware and software

• A reduced number or no requirement for internal technology staff

• Comprehensive security resulting from combining the needs of multiple organizations into a cohesive framework.

What is new is that if the margins of providing the service fall below those of operating one of the types of businesses that are offered, the service providers now have the ability to become competitors in their own right with the underlying businesses to which they provide services. For example, Computer Sciences Corporation offers ASP services for property/casualty insurance, life insurance and annuities.^[97] The only thing preventing them from entering the marketplace as a financial services provider is branding and a few licenses. To keep pace with the rapidly evolving competitive landscape, many firms will be challenged not only to redefine their value proposition to customers, but also to restructure their organizations.

^[97]See Computer Sciences Corporation, financial services product offerings, available at http://www.csc-fs.com/offerings.