Patuma (not her real name) opened a restaurant in a high-density suburb in Lilongwe. In the first year of her business, she sourced chickens from mobile vendors, and her profit margins were small. She decided against raising the price of her products for fear of losing customers to the competition. One day, during a casual conversation with a friend, she learned about a company from which the vendors used to source the chickens. Armed with that piece of information, Patuma ditched the vendors and started buying straight from the company. This strategic move improved her margins significantly. Patuma’s case is an illustration of what in business is known as disintermediation.
What is Disintermediation?
Disintermediation is the act of bypassing or eliminating a business which in the supply chain sits between your business and your supplier or customer. In non-diversified economies, many people find it difficult to find employment. As a result, they capture value by cracking open the supply chain and squeezing themselves between existing businesses. An extreme example is that of a band of overconfident brokers known as Phambiya in Lilongwe, who colonize a business for an hour or two and charge customers twice or thrice the price of the goods on offer; they then pocket the difference and walk away with fat wallets.
Intermediaries do not add any value to the product along the supply chain. Instead, they raise the cost of doing business and reduce profit margins for businesses through markups and service charges. As distributors, intermediaries can price your products out of the market. Finally, they can compromise the quality of your goods through poor handling.
Disintermediation Strategies
There are various strategies for bypassing or eliminating intermediaries, depending on where they are located in the supply chain. If they sit between your business and your customers, you can employ what is known as Direct to Consumer (DTC) model. This strategy involves selling straight to the consumer, without passing through the middleman. The DTC model has a number of benefits: First, your products are cheaper and therefore more competitive on the market. Second, you can have a more direct communication with the consumer. This connection allows you to understand how the consumer is interacting with your product. The internet has made it easier for businesses to interact with consumers more directly. Third, you have greater control over the quality of your product, because you take care of most (if not all) of the primary activities of the value chain.
If the middleman sits between you and your supplier, you can use Direct Sourcing, whereby you go further upstream to the producer of your business inputs. Direct sourcing eliminates delays, reduces process complexity and costs, and ensures product quality. This strategy is fairly easy to implement in perfect or near-perfect competition, a market structure where information flows almost symmetrically.
Conclusion
To stay competitive, businesses have to contend not only with the competition (those located at the same level of the supply chain) but also intermediaries, who try to capture value by mediating transactions between one business and another. With disintermediation, businesses can regain control of their processes and gain competitive advantage.
By. Wilfred Sumani, SJ
