The Consumer Distribution Channel (CDC)
The widespread use of the internet and e-business applications for online selling has given manufacturers the option of cutting out intermediaries from the original CDC in order to sell directly to consumers. This results in a CDC made up of only the producer and the consumer.
This can be seen in three forms:
- (a) The original situation
- (b) Disintermediation omitting the wholesaler
- (c) Disintermediation omitting both wholesaler and retailer
The Importance of This Study
The CDC, and its ability to produce profit for any goods manufacturer, is at the heart of its business model. It plays a critical role in determining whether that manufacturer’s operations succeed or fail.
Changes in the CDC, such as “cutting out the middleman” (disintermediation) or introducing new “middlemen” (reintermediation), can have a big impact on a company’s competitive advantage and, ultimately, its future. That’s why it’s vital for manufacturers to understand the critical challenges involved so they can take advantage of the opportunities presented by e-business.
Disintermediation: An Attractive Concept?
The idea of eliminating the CDC’s “middlemen” has a lot of appeal. Higher profit margins and access to important consumer information appear to be the primary drivers of disintermediation. Cost-cutting constraints in highly competitive industries are pushing businesses to find ways to reduce payments to intermediaries. In some cases, complete disintermediation could eliminate those costs entirely.
Manufacturers might also gain a lot from having direct access to customer data — it could help them better meet customer needs and improve satisfaction. These two elements alone — cost savings and customer data access — have the power to boost a company’s competitive edge.
Success stories like Dell’s add to the confidence in this model. Dell discovered that it could better meet customer needs through direct contact and even allows product customization during ordering. That’s a step beyond merely obtaining customer info — it lets customers dictate product specs before assembly. This would be expensive and complex if intermediaries were involved. Dell used this model to differentiate itself and become a clear market leader in the PC space.
Disintermediation in Reality
Even though disintermediation looks attractive in theory, in practice, the benefits are often not fully realized. While the concept is backed by many ideas, there’s little empirical evidence confirming its effectiveness in most cases.
Real-world challenges have discouraged manufacturers from going all-in. For example, a clothing manufacturer’s failed attempt to sell directly online — bypassing intermediaries — serves as a cautionary tale.
The Critical Issues
1. Costs
While disintermediation could lower costs, many businesses ignore the economies of intermediation. Large manufacturers may benefit from scale in production but usually don’t when it comes to distribution or services.
In some cases, the cost of replacing an intermediary with internal services may end up higher, or at least less efficient. Even if cheaper, the quality of service may fall short when compared to what professional intermediaries provide.
Therefore, disintermediation only makes sense if manufacturers can match or beat intermediaries in both cost and service quality.
2. Justifying Higher Costs
If a manufacturer can’t match the cost or quality, they need to ask whether other benefits (like data or control) justify the extra expense. Dell, for example, might spend more, but the customer insights it gains are invaluable.
Each firm must figure out which strategy — cost reduction or deeper customer understanding — will give them the strongest competitive edge.
3. Market Conditions
Market dynamics play a huge role. What works for Dell may not work for others. The viability of disintermediation depends on the nature of the service and the complexity of the product.
For example, intermediaries like clothing retailers offer essential services such as letting customers see and try on clothes. On the other hand, downloadable products like software don’t need a retail presence — and customers prefer the instant access.
That’s why companies like Dell can thrive, while others like Levi Strauss have failed despite heavy investments in direct selling.
4. The Value of the Product
Most arguments for disintermediation focus on cost, not on the value intermediaries bring to the product. But intermediaries often perform primary activities in the value chain, helping to enhance the final product.
If intermediaries significantly increase the product’s value, removing them can result in a lower-value product, or one that’s perceived as entirely different — potentially reducing demand.
5. Core Competencies
Businesses should focus on what they do best. When a manufacturer tries to take on marketing, logistics, or distribution, they risk diluting their strengths.
Competing in areas where they lack experience creates disadvantages. Intermediaries, on the other hand, can use emerging technologies more efficiently in their specialized roles. Disintermediation might even push them to improve further — lowering costs or enhancing services.
So, manufacturers could benefit more from partnering with capable intermediaries, freeing them up to focus on core strengths like production.
Reintermediation: A More Attractive Concept?
E-business hasn’t just made disintermediation possible — it’s also paved the way for new types of intermediaries. Existing ones have become more efficient, while new ones offer added value.
Consumers now love using price comparison sites, product review platforms, and online marketplaces like Amazon. Companies not featured on such platforms lose visibility and market share.
Take Amazon as an example. Originally a book retailer, Amazon used e-business to attract a massive customer base. Their value-adding services pulled in consumers far beyond what any individual publisher could.
Now, Amazon sells almost everything. Any manufacturer avoiding platforms like Amazon risks losing major sales opportunities. By teaming up with powerful intermediaries, manufacturers can offer customers a richer experience and reach a broader audience.
Affiliate Marketing and Other Tools
Online tools such as affiliate marketing let manufacturers promote products via thousands of online users. They pay only when a sale happens, making it a low-risk, high-reward marketing strategy.
This “invite-everyone-to-sell” model ensures that marketing spend is results-driven and scalable.
Understanding the Shift
Disintermediation refers to removing intermediaries from the supply chain. It became a buzzword in the 1990s with the rise of direct-to-consumer e-commerce. However, its success depends on various factors: technology, consumer behavior, product type, and market dynamics.
Removing middlemen can reduce delays and costs, while increasing profit margins and providing access to consumer data. This can strengthen relationships through loyalty programs, product customization, and direct issue resolution — much like Dell or Ryanair, which now interact directly with their customers without relying on travel agencies.
But at What Cost?
In many ways, disintermediation makes the producer the distributor. This can strain or destroy relationships with intermediaries. It also demands new customer services to replace those removed — such as handling returns, customer service, and small-scale shipping.
Reintermediation: The Other Side of the Coin
Reintermediation involves adding new intermediaries who offer fresh value propositions or technological innovations.
There are four common roles:
- Aggregation – Platforms like Amazon or Expedia collect demand and personalize the experience.
- Matching – Marketplaces like Kayak or eBay link supply and demand without holding inventory.
- Trust – Services like PayPal or VeriSign rebuild consumer confidence.
- Facilitation – Brokers such as Kickstarter or SABRE streamline financial and logistical transactions.
Counter Mediation
In some cases, companies create their own intermediaries — a strategy called counter mediation. The goal is to control critical parts of the supply chain and prevent competitors from gaining a strategic advantage.
