The Hindu Business Line : The new age intermediaries

Today's intermediaries consolidate information, allow complete product sale and purchase, and provide an alternative to shopping malls and their huge infrastructure. The value proposition made by these new intermediaries is such that they create a definite space for themselves in the new market.

FINDING better ways of doing things at lower cost has always been the primary concern of all business endeavour. Globalisation and the knowledge economy have emerged as the principal stimuli and effective catalysts in this process.

Together, they have enabled the production function to be treated as a `value chain' or `production network', where each process or sub-process need not necessarily be linked with other such sub-processes.

This has enabled the manufacturer or service provider to reduce cost simply by fragmenting the production process or by manufacturing components and assembling them at different locations. Such production restructuring is giving rise to phenomena such as outsourcing, dis-intermediation and re-intermediation.

In the long run, you may not need shopping malls with their huge physical infrastructure. The new intermediaries and institutions have become perfect substitutes. Examples are Amazon, e-bay or other such online entities supported by the rise of courier companies.

Companies such as FedEx and DHL owe their emergence partly to this factor. And more firms on the same model are emerging.

The new order will dismantle many traditional institutions. Those who are trying to protect the interest of small shopkeepers from the threat of multinational retailers may learn a lesson. People will prefer to have things delivered to their doorsteps because of problems such as lack of parking space, and shortage of time.

Take the travel agency business, for instance. In recent times, competitive fares have urged airlines to sell their products directly to travellers through Web sites and call-centres.

Creating knowledge workers and information always involves high costs. But the output is cheap to reproduce.

Herein lies the microeconomics argument; you may have high fixed cost initially but marginal variable cost ultimately favours a firm's economies of scale. A firm might have spent lakhs of rupees to develop a software product.

Interestingly, each extra unit of the CD costs next to nothing to make. This is particularly true if it is also sold over the Internet.

It is often cited that direct-to-home television programmes will revolutionalise the entire scenario regarding cable TV connections. You may not need many people to handle it. The cablewala may suddenly disappear from the market.

Many executives such as steel magnate Mr L. N. Mittal and Infosys' Chief Mentor, Mr Narayana Murthy, have been claiming for years that information technology and communication were altering business firms' practices.

Incidentally, these are major contributory factors to the new economy. Unfortunately, the pundits have failed to visualise this aspect.

The arguments of revamping management courses are firmer now than before.

Most of the case studies are obsolete and developed in accordance with the old economy, which renders them irrelevant in the current economic context.

A traditionalist will simply try to protect the paucity of knowledge. Then, again, along the value chain, intermediaries used to provide value to the customers. As long as this was higher than their cost, the intermediaries had a value addition and thus survived and, often, prospered. However, with globalisation and technological changes, both the value of their services and their cost have been affected.

Technology enables low-cost alternatives, even for the retail customers — earlier, the operations had high fixed and low variable cost features.

The intermediaries had a role in unbundling such product offerings — for example, a travel agent had to set up an office with fax, ISD and telex, computer links with airlines, and so on. A retail customer found it cheaper to use the services of a travel agent than deal with the airline directly.

This has changed as the cost structure has changed to very low fixed cost and low variable cost and so disintermediation of travel agents seems a viable proposition.

However, re-intermediation is also taking place simultaneously. There are new Internet intermediaries who consolidate information, allow complete product sale and purchase (for example a complete tour packages, not only air tickets), provide links to hotels and car hires and allow viewing of competitive fares.

The value proposition made by the new intermediaries is such that they create a definite space for themselves in the new market.

ITC's e-choupal is another example of disintermediation in an old business whereas bandwidth trading companies are examples of new intermediaries.

For some years now, farmers in developing economies have been taking advantage of the cell phone and, sometimes, the Internet. They get information relating to market price data and then decide in which market to sell their produce.

In many parts of the country, the middlemen are having a hard time finding alternative employment opportunities. If everybody you know in the villages goes to e-choupal to sell their products, you will find life easier if you use it too. Perhaps it is still a question of concentration of the market-share in the hands of few firms. The so-called competition may not exist at all.

(The authors are Professors at the International Management Institute, New Delhi)