Published on May 28th, 2015 | by David Bott and Jan Godsell

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A word that Schumpeter would be proud of

Disintermediation is a word that sounds like it was made up. But it is also a word that scares people in many markets, and with good reason. Disintermediation is the reason why there are virtually no record shops anymore and a diminishing number of bookstores. It is what people call the effect of digital services on a supply chain. And it has not finished its work.

To understand its power, we need to go back to how supply chains have developed. Once upon a time, if you wanted something you either made it yourself or went to the local expert in making such things and agreed a price or barter value. Then the industrial revolution enabled us to make a very large number of things, rather than the small number that existed when making things was a craft and not an industry. This, in turn, caused the problem of how to distribute all those new products to all those potential customers. This was solved by a distribution system with intermediaries, or middlemen, holding smaller numbers of things and selling them locally in shops. The flow of products down the supply chain was complemented by the flow of information about what people wanted back up the chain. If things didn’t sell in the shop, they didn’t order anymore and the factory made less. There was lag in the system, but the feedback mostly worked.

With the advent of the Internet, it became possible for potential customers to signal directly to the factory what they wanted – and possibly even buy a customised version directly from the factory. This gave rise to a large number of delivery companies and the logistics explosion happened. In the case of music, the “product” had been turned into digital format years before with the introduction of CDs, so it was a trivial exercise to send the “product” direct from the manufacturer to the customer without the need for shops. Books took a little longer – although you can get books in digital format, we seem curiously reluctant to give up paper copies – only a quarter of books are sold as e-books. Nevertheless, the ability to buy books directly from companies like Amazon has caused major restructuring of the book retailing market around the world with many chains no longer in existence.

It was thought that clothing would not go the same way – the assumption that customers would value trying clothes on in stores meant many did not move their business model. But online retailers countered with a simple returns procedure and there are credible ways to scan in body shape with available motion capture technology. There are also virtual reality approaches that allow the customer to see what they would look like wearing their potential purchase. It seems the drive to direct selling is strong and getting stronger.

Which brings us to another market that currently thinks things will not change – healthcare. The supply chain is a bit more complicated because the customer/patient seeks recommendations as to product/therapy by a third party – a doctor. However, there is already instability in the market, with the beginning of competition between the various actors as to who adds the most value. The doctors still control prescription, but pharmacies are lobbying to offer simple diagnosis and recommendations for therapy in addition to the personalised checking they already do. But the pharmaceutical companies have disintermediation on their side. Although there needs to be a different channel for treatment of acute problems, for chronic illness, if the doctor diagnoses and recommends treatment – either a single drug or a cocktail of drugs, why cannot the patient receive their treatment directly through the post? There will be issues to avoid once started. Once a major supplier gets hold of information about our normal therapeutic regime, will we get e-mails saying, “Customers who bought X drug also bought Y drug”? What happens, and who is liable, if the drugs aren’t delivered on time? These can probably be overcome, but the driver in the other changes has primarily been about the benefits to the customer. We have shown by our actions when we like new ways of doing things and when we don’t. And the advantage of being a first mover in these changes is, by now, well-documented.

Disintermediation may be an odd word. It may sound like it has been made up by sticking a couple of prefixes to the noun formed by adding a suffix to a transitive verb. But more than any other word it has captured the spirit of “creative disruption”. And where will it stop?

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David Bott is Principal Fellow at WMG. After 26 years with BP, Courtaulds and ICI, spent in both their corporate centres and business units, David began a love affair with start-ups 10 years ago. He was diverted into spending 7 years setting up and directing the Technology Strategy Board (now rebranded as Innovate UK), the UK's innovation agency.

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