Fernando Machado Píriz's Blog

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Archive for March 2017

Disintermediation, business modularity and marketplaces

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Four out of the five last business executives I’ve spoken with as a Microsoft Digital Advisor, one way or another, care about the topics in the title of this post. They’re in different industries, from agribusiness, logistics, and of course, banking; they might have used different terms, but they all do have these concepts in mind, although not necessarily all the dots are clearly connected. Here I’m covering a personal viewpoint on how these concepts are interconnected.

Let’s start with disintermediation. Disintermediation is the elimination of intermediaries in a value chain. Netflix having it’s own production studios for exclusive series like House of Cards, and many others, it’s an example of disintermediation, because they don’t depend on Hollywood studios and films distributors in order to get prime time content.

Going back to the industries mentioned in the introduction, an example in agribusiness might be an organic farmer selling their fruits and vegetables direct to people like you and me, instead to a contract farmer, who sells it to an agricultural corporation, that sells it to the groceries stores where you and I usually buy them. Although disintermediation in this example is far from being widespread, it challenges the core businesses of the contract farmers, the agricultural corporations, and the groceries stores, because they’re no longer needed for us to get fruits and vegetables at least; and it’s good for providers, because they can probably sell their products for a better price, and is good for us because we know the exact sourcing of what we’re eating and probably paying less that in the groceries stores for the same products.

Another example, this time in the banking industry, might be peer to peer lending, where people and enterprises who has money uses an online service to lend directly to borrowers. Lenders in peer to peer lending have less infrastructure and lower compliance costs than traditional banks, so they can lend money at lower interest rates than traditional banks, which is good for the ones who borrow money; but is also good for the lenders, because often they earn higher returns compared with similar products offered by traditional banks.

The agribusiness example is complete disintermediation -there’s nothing between the provider and the consumer- while the later is partial disintermediation -there’s an online service between providers and consumers-. More on that later.

Although disintermediation becomes more common in more industries, and in more products and services inside industries as times goes by, it doesn’t happen in every aspect of every business at the same time; but the trend is irreversible. Then while some industries and companies with vertically integrated business models -one-stop shops for the variety of touch points along the value chain- are being seriously disrupted by disintermediation and fight against it, others are instead embracing disintermediation already, leveraging what this article from Oliver Wyman calls business modularity. While the article covers the financial services industry, business modularity is applicable to many, if not all, industries. The next couple of definitions are taken from there.

In one hand, modular demand is when “product or service providers no longer own the direct customer relationship”. It’s business as usual for most producers in the agribusiness industry, but isn’t as common at all in the banking industry, yet. Another example of modular demand is the hotel industry: even before the emergence of travel reservation sites like Expedia.com, TripAdvisor.com, and others, you used to book your hotel stays through a travel agency, it was rare to directly call to a hotel to make a reservation.

On the other hand, modular supply occurs when “the supply chain is not delivered in-house, when parts of production are performed by different firms”. Once again, it’s business as usual for most producers in the agribusiness industry, but isn’t common in the banking industry. Restaurants are a good example in a different industry: they don’t produce the raw materials they use for the menu they offer, nor the species and other ingredients; they don’t make the dinning tables, nor the tableware, not table clothes, and so on.

Both modular demand and supply comes in degrees, modularity goes from low to high and everything in between. When demand and supply modularity is low, you have the vertical integration we mentioned before. The interesting combination for this post comes when both demand and supply are highly modular. Why? That’s where the concept of marketplace comes into place.

A marketplace, also known as business platform in Platform Revolution by Geoffrey G. Parker et all, or digital  business technology platform accordingly to Gartner, it’s an enabler for interactions between consumers or users in the demand side and product or service providers in the supply side.

The marketplace is used to exchange “value units”, i.e. the products or services offered by the providers and consumed by the consumers or users. The market place has at least one “intelligent” component that matches the needs and interests of the consumers with the products or services offered by providers, in a way that satisfies those needs or matches those interests. The key in these marketplaces is that all transactions happen through and thanks to the marketplace. There is one way to monetize the interactions in the marketplace, as a per-transaction fee or as a percentage on the value units being exchanged, charged to providers, consumers, or both, but isn’t the only one. Producers can be charged an entry fee or on an ongoing basis as long as they are part of the marketplace; and the same is true for consumers or users.

Imagine you’re about to buy, let say, a car. A cars’ marketplace can offer you brand new or second-hand cars from multiple dealers and car manufacturers. The market place knows you well enough to propose appealing loans or leasing options, either from banks or peer-to-peer lending companies, as well as insurance from different insurers. The insurance policy can be calculated based on you driving habits, mileage, etc. by using a device offered by a third party that is connected to the car bus to gather telemetry data that’s sent to the insurer, and eventually to the marketplace too, lowering down the policy price if you drive carefully and defensively or don’t use your car too much, or raising it up if you drive imprudently. The marketplace can also offer you car maintenance or car washing services; those can be regular services, or the service provider can pick your car up and drop it back few hours later, so you so you don’t need to move from your house or your office, because the marketplace knows you’re very busy. And what’s even more interesting, if the marketplace knows you well enough and it’s “smart” enough, it can recommend you to don’t by a car at all, and instead suggests you to use a shared car service, a carpooling service, or simply rent a car whenever you need it. This cars’ marketplace can be used by individuals like you and me, but also by fleet owners, etc.

Once the marketplace has enough data about transactions, it knows a lot about both providers and consumers, and can answer questions like who, when, what, how much, etc. Here’s where the second “intelligent” component of the marketplace comes into place, because this data isn’t only useful to the marketplace itself, but can be very valuable to third parties that are willing to pay for it. Addressing privacy and compliance issues and regulations, e.g. by segmenting and anonymizing data, a whole new business model appears.

The marketplace can be viewed from three different, but complementary, points of view:

  • The business aspects, i.e. how to define and monetize the platform. Part of this blog post tries to address that particular aspect.
  • The technology aspects, i.e. the cloud services, API strategy and architecture, mobile platform and development tools, IoT and big data, containers, and so on. More on the technology aspects on my previous blog post.
  • The ecosystem aspects, i.e. how to run hackathons and discover and incubate startups to expand the services or products offered, how to engage with research and the academia, how to connect with government and non-government agencies, and so on.

Any serious attempt to build a new marketplace or participate in an existing one should consider all the aspects aforementioned at the same time, as well as the relationship of marketplaces with business modularity and disintermediation.

Written by fernandomachadopiriz

March 25, 2017 at 11:37 am