Not long ago companies embracing the Internet thought e-commerce meant cutting out intermediaries. Businesses would go directly to customers and save money. Times change and perceptions crumble. Companies discovered it isn’t so easy to do everything alone. Middlemen are still needed. However, their role is changing. Only those middlemen and producers who understand just exactly how the intermediary role is changing can make good on the promise of e-commerce. Intermediaries add value. Three of the nine ways they currently add value (providing information about buyers, sellers, and goods or services) probably will change; middlemen will have to provide all that gratis. Another set of functions (economies of scale, economies of scope, arranging convenient times and places) will survive in a new form. The final three activities (reducing uncertainty about quality, preserving anonymity and tailoring offerings) represent growth opportunities for specialist companies and supplier partners.
Consider the upstream company, the one that expected to use the Web to cut out middlemen. How does it succeed today? It weaves a distribution partnership and finds new ways of compensating members. It moves away from selling wholesale and leaving the channel partner to fight for a markup. The proper response to the Web for suppliers is to embrace channel partners, not replace them; the proper response for channel intermediaries is to leverage, rather than dread, Web-enabled commerce. Providers will get closer to their customers, all right, but not by a direct path.
The Travels of a Light Bulb
Research in the 1950s established that even General Electric didn’t know how a light bulb got from factory to kitchen fixture. The product took a complex route through multiple downstream organizations.1
Today many producers regard the opaqueness of distribution channels as covering inefficiency. Their own output they deem desirable and certain to find its market. Downstream channel members don’t add value; they add costs, snatch margin and muffle the voice of the customer. The shorter, simpler and more linear the distribution chain, the better, producers say.
The Internet was supposed to enable simplicity. Business gurus predicted it would bring manufacturers in direct contact with end customers. Channel partners looked upstream fearfully, less worried about competition from new, Internet-only channels than the prospect of competing with suppliers. Mistrust flourished.
The idea was that the Internet would help both consumers and industrial buyers make purchases like the rational (RAT) economic actors who populate economics textbooks. RATs are bargain hunters.
1. R. Cox and C.S. Goodman, “Marketing of Housebuilding Materials,” Journal of Marketing 21 (July 1956): 36–61.
2. A.T. Coughlan, E. Anderson, L.W. Stern and A.I. El-Ansary, “Marketing Channels,” 6th ed. (Englewood Cliffs, New Jersey: Prentice Hall, 2001), 88–99.
3. Anonymous, “To Have and To Hold,” The Economist, June 16, 2001, 9–11.
4. For a review of those reasons, see J.B. Quinn and F.G. Hilmer, “Strategic Outsourcing,” Sloan Management Review 35 (summer 1994): 43–55.
5. For more on replacing gross margins with fees for service, see A.J. Fein, “Facing the Forces of Change: Future Scenarios for Wholesale Distribution” (Washington, D.C.: National Association of Wholesaler-Distributors, 2001).
6. S. Buel, “Searching for the Retail Trifecta,” The Industry Standard 6 (October 2000): 108–116.