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Chapter 9. Intermediation and Cybermediation

Foundations of Net-Enhanced Organizations

Detmar Straub, 1st EditionCopyright © 2003 John Wiley & Sons, Inc.

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Copyright John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the United States Copyright Act without the express written consent of the copyright owner is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. Adopters of the textbook are granted permission to make back-up copies for their own use only, to make copies for distribution to students of the course the textbook is used in, and to modify this material to best suit their instructional needs. Under no circumstances can copies be made for resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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Chapter 9. Learning Objectives

• To define the concepts of intermediation and cybermediation.

• To be able to elaborate on the fundamental qualities of intermediation and cybermediation.

• To distinguish between disintermediation, reintermediation and cybermediation.

• To articulate one theory of intermediation.• To recognize and argue for the value-add of

intermediaries.• To identify intermediary roles in NE.• To compare and contrast atomic models and

cybermediaries.

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Chapter 9. Outline

1. Introduction

2. What is Intermediation?

3. Bricks-and-Clicks Intermediaries

4. Disintermediation, Re-intermediation and Cybermediation

5. Theory of Intermediation

6. The Value-add of Intermediation

7. Atomic Models and Cybermediation

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9.1 Introduction: Questions about Intermediation

• Basic questions to ask about intermediation:

1. What is intermediation and who are typical intermediaries on the Web?

2. Why do certain forms of intermediation persist in spite of the prediction that the Internet would result in the “death of the middleman”?

3. What are the value-added elements that have lead to their success over the long- term?

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9.2 What is Intermediation?• Intermediation: a business

process that lies between and facilitates (adds value to) the points in a value chain (see Figure 9.1)

• Intermediaries often provide an information-based service rather than a product.

– Their typical role is to bring multiple buyers and sellers together.

• Common examples are: stock brokers and travel agents.

Figure 9.1 Intermediaries in the Value Chain

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Intermediaries in a Value Chain

• The role of an intermediary is to:1. Use information to match buyers and sellers,

2. Facilitate the rapid transfer goods and services through their operation.

• Two major categories of intermediaries are:1. Virtuals: who do not take ownership of products

and services.

2. Aggregators: who may own, but do not produce or even assemble the goods and services themselves.

• When an intermediary offers its services over the Web, it is called a cybermediary.

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9.3 Bricks and Clicks Intermediaries

• Many makers of goods and services focus on their core competency and leave other aspects of their relationship with the final customer, such as marketing and logistics, up to intermediaries.

• Should a firm decide to become its own cybermediary, its efforts may be impeded because of the channel conflicts that will occur with its existing intermediaries

– This can have a negative impact on firm revenue.

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9.4 Dis-intermediation, Re-intermediation and Cyber-mediation (Figures 9.2 and 9.3)

• Disintermediation: adding a parallel link going around intermediators [Delta Airlines, encouraged customers to call direct to the airline, saving a 5-15% commission and disintermediating its travel agents].

• Re-intermediation: electronic re-insertion into the role of intermediator in a firm’s value chain [Delta.com allowed customers to go directly to its Web site to buy electronic tickets, taking over the job of brokers via a direct connection. – This is a direct-to-consumer business model, or possibly a

shared infrastructure model, as in the case of Orbitz

• A firm that offers intermediary services over the Web, is a cybermediary. This can disintermediate agents.

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Figure 9.2 Disintermediation

via Traditional Channels

Figure 9.3 Reintermediation of Delta into the Value Chain

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Is cybermediation worth the risk?

• Why are the companies willing to risk losses due to channel conflict created by cybermediation?

• Research indicates, for example, that much of what travel agents do for airlines is routine and transactional, with little value-added, and thus easy to disintermediate.

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9.5 Theory of Intermediation

• Since purchases and transactions that are least costly are preferable to customers, especially for commodity goods and services,

• All other things being equal, the value chain with the fewest intermediaries will have the lowest price.

• However, there are additional costs:– Intermediaries have their own cost structure.– Consumers incur costs when searching for goods/services

they with to purchase.

• Thus a consumers must weigh a cost tradeoff between searching for the cheapest commodity price and paying extra to use an intermediary.

13Figure 9.4 Producers, Consumers and Intermediaries

Intermediaries add steps to and increase value chain costs

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Intermediation Pre- and Post-Internet• A decade ago, for example, intermediation in air travel,

involved both airlines and consumers paying commissions to travel agents.

• When the issue of disintermediation was first discussed, many predicted the complete demise of intermediators.

• Sarker, Butler & Steinfield (1995) argued instead that cyberspace would change intermediation, but never make it irrelevant.

• They differentiated between categories of threatened intermediaries, like travel agents, who could lose their business, with cybermediaries, (e.g., Travelocity), who had very low margin costs and would thrive.

• Supplemented intermediaries, firms that decide to reintermediate into the value chain, were also predicted to succeed.

15Figure 9.5 Intermediation Pre- and Post- Internet

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Differentiated Products and Services

• Differentiated products and services offer useful services and embedded information, rather the competing on price alone.

• Some customers will be willing to pay extra for the extra added valued,

• Thus, the survival of threatened intermediaries depends on their ability to differentiate themselves from areas where economies of scale are the sole distinguishing feature.

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9.6 The Value-Add of Intermediation• Low cost cybermediaries will be increasingly used

for simple, high frequency transactions.• The future of traditional intermediaries’ depends on

their focusing on value-added products & services. – E.g., travel agents are likely to increasingly concentrate on

frequent, complex transactions, such as package tours and corporate travel negotiations.

• In general, physical intermediaries will continue to play a role in providing products and services that require more information and analysis than can be conducted through a Web site.

• These value-added roles for intermediaries can be grouped into five areas, listed in Table 9.2.

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Table 9.2 Value-Added Roles of Intermediaries and Cybermediaries (based on Westland and Clark, 2000)

Search efficiencies and information management

Use knowledge of how to procure items & services; create trading floor for buyers and sellers

Expedia.comeBay.com

Routinizing and guaranteeing transactions

Handle complex transactions; insure payments and shipments

Ibm.comAmex.com

Logistics Delivery of goods, locally or globally

Ups.com

Aggregating demand/ negotiating prices

Gather orders & negotiate prices with client(s)

Priceline.comETNs like Covisint

Creating packages Break bulk through large-volume purchases, and reassemble into packages

Dell.com

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9.6.1 Surviving Intermediary Roles

• Search Efficiencies and Information Management:– Intermediaries fulfill a valuable function when they know more

about markets than most buyers and sellers.

– Customers are willing to pay extra for this knowledge.

• Routinizing and Guaranteeing Transactions: – Transactional activities are often outsourced to banks and credit

card companies.

– These activities can be taken over by cybermediaries, since NE economies favor this.

– Intermediaries could also ensure there is no default, known as “securitizing the transaction”.

– The ‘insurance policy’ for each end of the transaction is a value-add that buyer and seller would be willing to pay extra for.

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9.6.1 Surviving Intermediary Roles (cont.)• Logistics:

– Logistic firms currently provide online tracking services so that customers can monitor the processing and delivery of their orders.

– Firms like UPS organize the links for the whole supply chain for Dell Computer, gathering together the monitors from Sony, workstations from Dell, and other peripherals from other suppliers and then deliver them to the ultimate customer.

• Aggregating Demand/ Negotiating Prices: – Relating to buyers and sellers in a many-to-many

relationship, some intermediaries represent the interests of numerous entities by coalescing demand and negotiating prices. The reverse auction model used by www.priceline.com exemplifies this approach.

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9.6.1 Surviving Intermediary Roles (cont.)

• Creating Packages: – Intermediaries can purchase goods in large

volumes and offer these for sale in assortments that would be extremely costly for buyers to put together on their own.

– In such cases, the value-add by intermediaries can successfully compete with less flexible cybermediaries.

– An example would be a personalized travel package, combining airfare, tours, vehicle rentals, and cruises offered to tourists by firms like Rosenbluth Travel (www.rosenbluth.com).

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9.7 Atomic Models and Cybermediation

• Note that intermediation as discussed differs from Weill and Vitale’s atomic business model for intermediation.

• Their definition was: “bringing together buyers and sellers via such services as search engines and auction sites.”

• The model used here includes other atomic models is more closely related to traditional bricks and mortar intermediation (see Table 9.3).

• Another difference from Weill and Vitale’s model is that the intermediaries described here can also own their own inventory.

23Table 9.3 Intermediary Roles in Atomic Business Models

Weill & Vitale Atomic Model

Intermediary Role Characteristics

Intermediary Model Search efficiencies and information management

Shared Infrastructure Aggregating demand and negotiating prices

Value Net Integrator (VNI) Information management; routinizing and guaranteeing transactions

Full-Service Provider Creating packages; logistics

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Intermediary Roles in Atomic Business Models

• Weill and Vitale’s intermediaries compete by lowering the search costs for their customers to find the products and services they are looking for.

• Firms like airlines have also created shared infrastructure businesses like Abacus or Orbitz to better control their distribution channels and not abandon them to third parties like Expedia.

• Value Net Integrators are pure information managers.– They make transactions like procurement and distribution ordinary

and let franchises, branches or customer firms focus on their core competencies.

• Full Service Providers can also be highly virtual, offering customers a one-stop service differentiating themselves from multiple and competing providers.

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9.7.1 Portals and Content Aggregators

• Companies like Yahoo and Amazon are described as cyberspace “portals” and “content aggregators” – Their true business models are complex hybrids and

include being intermediaries and making direct-to-consumer sales.

• Again the main idea is replacing physical processes with information processes.

• If Yahoo was a retailer like Wal-Mart, its distribution system, etc., would have to be huge.– Instead it handles these processes through its Web-

based and information-based systems. Its market niche in the economy is based on this.

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End of Chapter 9