Business is constantly changing due to rapidly developing technologies. New technological competitors emerge, which eliminate established business areas and create a new ecosystem. The first industries that were undermined by the internet were music production intermediaries and video rental business; technological competitors also penetrated hotel, taxi and freight businesses, thus taking over a significant market share. There is a serious pressure on travel agencies, traditional banking sector, retail and wholesale companies. The tendency is that the first wave of technology will most gravely affect intermediaries. As technologies evolve and grow both vertically and horizontally in all realms of life, pressure on traditional business enterprises will only increase. This article seeks to find out the reasons why intermediary business is most quickly taken over by technological competitors; which intermediaries are most vulnerable; which technology has led to this transformation and what strategies are to be applied in order to compete effectively in the age of technology.
Concept of Intermediary and Its Beginning
Before starting an in-depth analysis of the situation, it is important to distinguish the concept of an intermediary and to look at the history of how they came to be. The concept of “intermediary” has changed a lot, depending on the times; in the narrow sense of the word, an intermediary is a person or a company that buys goods or services from a natural person or a company and sells them to another natural person or company. Historically, intermediaries have played an important economic role in the supply chain, delivering goods from the manufacturer to the end user. For instance, agricultural products are bought from farmers, and through intermediaries or trading houses enter processing plants, then reaching shop shelves. Or insurance brokers who insure end-user assets. So, in most cases, intermediaries do not physically own goods; they collect information, process it and adequately distribute it to the end user, receiving a commission for this work. In the broader sense, intermediaries earn their commission for efficient, timely and appropriate processing, management and distribution of information.
There is no precise evidence as to when the first intermediaries emerged, but in my opinion, they already operated in ancient times, when there was no money as such and when trading was based on exchange. I make this assumption because something had to influence exchange, the emerging of monetary units and overall economic development. Together with the developing world, intermediaries also evolved; the importance of their activity grew steadily as businesses developed worldwide, technologies improved, quality of life increased; all of which instigated the emergence and development of global trade, and in turn created a favourable economic environment for intermediaries. According to Esquire, intermediaries made America. Beginning with John Hawkins, who reformed international trade and came up with a solution preventing merchant ships returning to America empty: he started trading with other countries and is considered the pioneer of operations called triangular trade; and ending with Mark Zuckeberg, who became the intermediary of friendship, not to mention the founders of Google, Larry Page and Sergey Brin, who became intermediaries in information search.
What Problems Intermediaries Deal With?
Intermediaries play a crucial role in the economy as they contribute to the growth of trade. In many cases, without the help of intermediaries trade as we know it would be impossible. The operational principles of intermediaries are as follow: they manage information in a specific area; they have more inside information about the industry in which they operate – therefore, are more knowledgeable about demand and supply; intermediaries are professionals in their own field – that is why they also serve as advisers; they can offer better prices due to economies of scale; through the use of intermediaries, producers or service providers can reach the end user faster and at a lower cost; thus they help avoid the risk of possible misunderstandings between clients from different countries due to different mentality and other impediments; intermediaries assume potential risks related to the transportation and damage of goods, as well as other risks; companies that are not financially capable or lack required know-how to be strong in each part of the value chain, can benefit from intermediaries and their professional knowledge, which compensate for the missing links; companies using intermediaries can reduce their inventories, increase turnover and reduce seasonal impact; intermediaries eliminate financial risks when cooperating with third , such as Russia, Ukraine etc.
As a result, intermediaries manage large flows of information; therefore, they accumulate significant professional experience and maintain good trading relationships and communication with manufacturers, service providers and end users, thus creating added value. Intermediaries also emerged due to certain psychological characteristics of human behaviour, such as conformism, lack of security, simple laziness and other human behaviour-related faulty thinking. It is human nature to always seek advice; we are very interested in the opinion of the majority; we make business deals with trusted people more willingly; this is not always true, but then it is a separate topic that this article will not delve into.
What Technologies Influence Emergence of New Online Platform-Based Intermediaries?
Speaking of technological innovations when currently there are so many of them, it is difficult to distinguish the most important ones. We should also bear in mind that many technologies that will affect the future of business as well as the economy are still in the phase of development; however, I do not assume anybody will argue that the main technological innovation, which began to change the business, was the internet. The development of the internet led to the emergence of new technologies, such as smartphones, fast internet connection, Big Data revolution, smart sensors etc. It instigated a breakthrough in robotics and smart intelligence as well as the development of newer technologies. In my opinion, the above technological innovations predetermined the emergence of technological intermediaries, the increase of their influence and the general background of the new economy. It is a natural and logical sequence, since earlier human problems could only be solved by another person, and now technologies solve them in a simplified and more optimal way – this is a new era in the history of our society, which is both necessary and inevitable, as were all the preceding ones.
Why Influence of Traditional Intermediaries Decreases?
To analyse intermediaries in a deeper and more convenient manner, we will divide them into groups. They could be classified in a more detailed way and following other principles, since intermediaries operating in B2B, B2C, C2B and C2C sectors differ and deal with different issues. However, I think that my classification will provide a certain starting point and in many cases will allow defining an intermediary operating in any area. So, summarising all benefits provided by an intermediary, they could be divided into the following groups:
Group 1. Intermediaries who create added value by processing information. Those are intermediaries who, when processing information flows in a particular area, are able to gather market insights, which allows for a better understanding of supply and demand. This type of intermediaries accurately and timely identifies demand and offer a product or service.
Group 2. Intermediaries who can offer a better price due to economies of scale. Those are intermediaries who purchase large quantities of services or products, therefore getting higher discounts from manufacturers, service companies or other actors in the supply chain. Some of them have their own transport, warehouses, distribution centres, i.e. provide additional services, thus creating more added value. Due to economies of scale, they can offer better prices for the end user.
Group 3. Intermediaries whose services are based on problem solving, related to psychological characteristics of people. Those are intermediaries who are opinion leaders in their field. They are able to establish and maintain good relationships with their partners and to gain the confidence of all parties involved. They operate using various psychological traits of human behaviour.
Group 4. Technological intermediaries. The operation of those intermediaries is based on online platforms. Using mathematical algorithms, Big Data and artificial intelligence, they are able to collect, process and efficiently distribute information. There is a tendency that some of these intermediaries invest in additional parts of the value chain: transportation, warehousing, product distribution systems, advertising and other areas.
As we can see, the first three groups can be considered traditional partners, and the latter – technological ones. The main differences that distinguish technological intermediaries from traditional ones are the following: technological partners are based on online and technological platforms, and the operation of traditional intermediaries is based on human capital and real estate. Often intermediaries are of mixed type, i.e. they combine the features of several groups, in which case the influence of the intermediaries becomes stronger.
The best example, illustrating the collision of the first group with technological platforms, would be the emergence and development of UBER. Before UBER, the market for taxi services was very much lacking transparency (probably all of us have unpleasant memories of using taxi services in a foreign country, when for the same services we paid more than the locals), unsafe and totally lacking innovation. The companies in this area did not invest in the quality of service, failed to timely optimise their operation and to adapt to new technologies, and did not create niche services. In other words, it is an area that does not require expert knowledge; intermediary companies simply brokered the infrastructure (dispatchers) and cars (in some cases the drivers used their own vehicles), i.e. gathered information (identified demand) and assigned a car that would complete the service. UBER accurately identified taxi business issues, changed the service scheme, created a cheaper, more convenient, safer and more user-friendly way of operating, thus becoming the market leader and expanding into new geographies and new businesses.
Mixed traditional intermediaries, although more influential and harder to compete with, are also less resistant to the death by technology. The best example illustrating the decrease of their influence is traditional retail shops. Why do I assign supermarkets to mixed intermediaries? They have their own information processing centres; this information is used for marketing purposes and for planning supply and demand as well as inventory planning; they also have a developed supply chain; some of them have their own warehouses and distribution networks, and can offer better prices for large quantities of purchased goods; besides, those intermediaries are experts in their field. Smaller supermarkets often have only retail space and an information processing centre. As we see, the influence of traditional sales channels on the global economy is decreasing, while the market share of online shops, such as Amazon, Aliexpress, eBay etc., continues to grow. According to Businessinsider, e-shops will grow by 8-12%, or 3 times faster than traditional shops, and due to decreasing sales some of the market players go bankrupt (eg. Pauless, American Apparel etc.), while others cut on sales space and staff.
So, how come the influence of traditional sales channels and traditional business intermediaries is shrinking? To begin with, electronic business has been growing its consumer for many years; shopping in e-shops and using other electronic solutions was unusual before, because it was a novelty, people were concerned about the security of payments, the return of goods was complicated, the receipt of goods was too lengthy and the price did not differ significantly. The elder generation has a great impact as well: they were slow to accept innovations, but right now their technological awareness is growing rapidly and they are increasingly using the services of e-commerce. Technological development promotes increased consumer engagement and a more favourable attitude towards technological ventures. Consumers realised that e-shopping and other technological solutions have become cheap, easy and safe. Even more so, as the e-business did not stand still and constantly invested in the quality of services, the development of supply chains, built warehouses, installed efficient warehouse and logistics management systems, thereby reducing their prices and shortening delivery times. In other words, they became hybrid technological intermediaries with supply infrastructure that are able to process and distribute information more efficiently and at a lower cost. It is notable that with the development of technologies, they become cheaper, thus creating all necessary conditions for expanding into other business areas, creating new sales channels, expanding the range and more successfully sabotaging traditional sales channels, traditional value chains and traditional business. It is important to emphasise that, in many areas, traditional businesses also contributed to this development as they fell asleep on laurels, ignored consumer needs and forgot that they primarily had to deal with their customers’ problems in an efficient, simple and quality manner.
Will Traditional Partners Survive?
Obviously, this is not an easy question; probably some intermediaries will be eliminated, some will have to change their activities, and some will remain. Looking at the current situation, it should be noted that it is easier for technological intermediaries to succeed in the B2C sector, while they struggle more in B2B and other specific sectors. Why is that? First of all, trust in the B2B sector is of paramount importance, and traditional intermediaries are still leading here. Secondly, intermediaries operating in this sector require expert knowledge. Thirdly, in many cases, these partners have financial resources, are influential and have certain infrastructure, so it is not easy to outrival them. As a result, I think technologies that will have an impact on the major development of intermediaries in B2B and other sectors are still on their way. Looking ahead, it should be noted that the role of technological partners will increase in all sectors and in all areas of operation, because business logic is simple – all activities are profit-oriented. That is why companies are always looking for the most optimal solutions that increase profitability, so both sales and purchasing channels are chosen based on this logic. Business chooses intermediaries only after performing cost – benefit analysis, and they use them only if they are economically beneficial and add value. In the changing situation, intermediaries that do not create added value or the impact of their created value is decreasing, will be replaced by others. The opponents of traditional business could object stating that if they maintain good relationships with their customers or have psychological and financial ties, this will help to continue their business. I think it is not true; although I agree that the issues mentioned above will slow down this process and give more time, but in the long run, business returns to its source and makes decisions that optimise profit. I also agree with the fact that, due to psychological characteristics of human behaviour, some traditional intermediaries may again be in demand, but the scale will no longer be so vast and they will definitely not dominate the business.
What Should Traditional Intermediaries Focus on to Not Lose Competitive Edge?
We are approaching the main question: how traditional intermediaries should act in order to not lose the competitive battle to a technological platform? I believe the answer lies in the environment which makes the technological platforms flourish. These are all technologies related to changes and more efficient provision of services to the consumer. Therefore, I think many traditional intermediaries have the potential to survive and evolve, but first of all, they need to review their business plan, assess each and every part of it individually and responsibly and to determine whether it still creates added value for the client; if not, companies must develop new strategies and plans. I do not think it necessary to re-invent marketing and its theories; one simply needs to look at the entire value chain, its touchpoint with customers and to adequately assess each of its links separately. At the initial stage, ask yourself the following questions: Does my service still add value to the customer? Is my service still needed in the age of technology, and will it be needed in the future? Does my service or merchandising scheme differ from my competitors’? In which areas are we weaker and what can we do to fortify them? In which areas are we strong? How can we change the models of our service/product sales and production to become exceptional and competitive? What processes should we cut off and what new processes should we add to become more competitive? Is the current team and managers able to make the necessary changes? What kind of targeted and measurable investments are to be made in order to become more competitive? These questions will help you adequately assess your current situation, identify weak links and determine whether you need to change your area of operation and how you should do that. You might have to invest in technology or, on the contrary, in infrastructure to become more competitive. Is it worth expanding, or perhaps you should focus on a single area, in which you can achieve the best results. Perhaps merely cosmetic adjustments in the marketing plan or supply chain are enough. Leaders and the team are crucial in this assessment process, and I am convinced that you will need new executives who are well familiar with new technologies, think critically and analytically, are proactive and open to new ideas. The above qualities are needed for the efficient implementation of changes, and there will be more than one in the times to come. In many cases, old leaders who grew up with you and helped your company flourish lack necessary competences and qualities, and because of psychological aspects it is difficult for them to understand that the direction, which they led you towards and believed in so far, is not necessarily the right one. In his book The Hard Thing About Hard Things Ben Horowitz says that every business cycle of a company requires different leaders: a general is needed in the time of war, a diplomat – in the time of peace. What a company needs in the time of change is for the owner to decide, because each situation is unique.
So when you have completed the company’s assessment, chosen managers and team, identified a new business model or improved the old one, created a strategy and implementation plan, move fast towards your goals. I will just remind you that the world and technologies are constantly changing, so you should continuously review your new business model and proactively change together with the new world. Do not forget that in the times of change, new opportunities go hand in hand with threats.