Intermediaries are a powerful resource that enable organizations to outsource specific business functions in order to focus more on their core competency.
Identify the value of various intermediaries, and understand which situations call for collaboration with them
- Intermediaries take on key responsibilities of the value chain for organizations, such as shipping, retail, e-commerce, storage, web development, and marketing.
- Through utilizing intermediaries well, organizations can capture significant time and capital savings that can instead be invested into the core competency of the company.
- Distribution is a strong example of intermediaries, where an organization collaborates with Fedex or UPS in order to move their goods to their customers. Creating a shipping competency internally would be much more expensive.
- Retail and e-commerce are also common examples of intermediaries. Instead of purchasing expensive property to build storefronts, a fashion designer could instead sell their goods wholesale to established retail outlets.
- Understanding when to outsource something to an intermediary, and when to build the competency in house, is a key area of strategic decision-making.
- e-commerce: A marketplace for the exchange of goods that exist solely online.
- intermediaries: Organizations that act as a provider of a specific function or service for other organizations.
Why Use Intermediaries
Product distribution is the way an organization moves a product into the hands of their consumers. Most organizations focus on the design and production of the product or service they sell, and not on the distribution channels that connect them to the users themselves. Instead, they outsource many of these aspects to intermediaries.
Intermediaries are specialists for a specific function along the value chain. This could include distribution, marketing, sales, retail, e-commerce, web development, branding, packaging, storing, and a variety of other functions. Collaborating with one or more partners can enable an organization to focus on what it is that they do best (core competency) and, in turn, outsource other aspects of the value chain to organizations who are best at that particular function.
Some of the most common intermediaries are related to product distribution. Moving a good from the producer to the buyer is a logistically complex and resource -heavy process. Ensuring that shipping resources are available (e.g., trucks, ships, planes, and trains primarily) and that items move from supplier to warehouse to user is often handled by an intermediary such as Fedex or UPS. These organizations can utilize economies of scale and a vast network of resources to offer highly specialized delivery services at a relatively low cost and, more importantly, low risk.
Buying real estate to store and sell physical goods can be extremely cost prohibitive. Investing in retail outlets all across the world requires a huge amount of fixed investments, and likely will incur a high amount of debt. This debt is a business risk most smaller producers do not want to incur. As a result, they sell their items wholesale to various retail outlets. This allows both parties to mitigate risk, as the retailer can sell a variety of goods without having to produce them all, and the producer can acquire sales channels across the globe without investing significantly in real estate.
Consider a store like Macy’s, where the shelves are stocked with brand name goods. Macy’s in downtown Manhattan is an expensive piece of land, but the suppliers themselves are not liable for the purchase and maintenance of that property. Instead, Macy’s diversifies its portfolio of goods while producers provide them at lower wholesale prices to share risk.
Another popular intermediary is the ad agency. Ad agencies specialize in building communities and brands, utilizing a wide variety of paid and organic channels. This can include social networks such as Facebook, Linkedin, Twitter and Instagram, as well as paid ad production on popular TV channels or affiliate advertising. Ad agencies utilize the entire marketing mix (and more, nowadays) to craft customized brand building initiatives centered on the unique target market and product of their strategic partners.
E-commerce and Web Development
Maintaining an online storefront nowadays is relatively straight-forward, so more and more companies do this internally now. However, managing a large e-commerce team with strong web development skills (such as copy, graphic design, UX, and other e-commerce roles) can become a pricey endeavor. As a result, some organizations prefer outsourcing this as well.
Amazon is a great example of an e-commerce website designed to enable smaller businesses. Amazon actually handles quite a bit of intermediary responsibilities (i.e. shipping, storing, and e-commerce for starters). The value Amazon adds is not only limited to the skills of building strong websites, however. Amazon has a huge and loyal following of consumers, which makes them an attractive potential strategic alliance for many smaller firms.
What’s most important to understand about intermediaries is that they are a trade-off, where an organization recognizes the value of outsourcing a function relative to the opportunity cost of building that competency internally. When considering working with a third party, consider the core competency of that partner compared to the core competency of your own organization and determine if synergy exists (as opposed to redundancy).
The Value of Intermediaries
Utilizing intermediaries reduces organizational complexity and allows firms to focus on developing a core competency through specialization.
Outline the various benefits of utilizing intermediaries, and understand how to capture value from the process
- The primary advantage of intermediaries is the ability to focus specifically on what your organization does best. This is called specialization.
- Building internal capabilities in a variety of complicated fields, such as legal, HR, accounting, BI and countless other disciplines, is often a significant investment of time and resources as well as a source of risk.
- Organizations with many different departments focused on a wide variety of disciplines is likely to lose some agility due to complexity.
- Intermediaries that focus on doing one thing best for a wide variety of strategic partners will likely realize economies of scale. This means that by doing something in high volume, the marginal cost of additional units is significantly lower.
- Through utilizing intermediaries along the value chain, firms can maintain simple, specialized core competencies while mitigating risk and capturing economies of scale via similarly specialized partners.
- specialization: The ability to focus on one specific task, and create an advantage through excelling at this task.
- intermediaries: Organizations or individuals that fulfill tasks on behalf of other organizations.
Why Use Intermediaries?
Organizations use intermediaries in order to allow themselves to focus on their core competency and/or competitive advantages. This creates the economic advantage of specialization, and enables multiple strategic partners to collaborate on the design, production, and distribution of countless goods and services.
For example, assume you own a company that produces top quality audio equipment (speakers, surround sound, headphones, etc.). Your sound engineers are some of the best in the business, but you have limited resources. When it comes to retailing your items, you don’t have the capital to purchase property and open stores. So you use a marketing intermediary, and work with companies that sell music equipment. You also don’t have the capital to open a mass manufacturing facility, so you outsource your production to specialists in audio manufacturing. Instead of building a complex tax and finance team, you hire an accounting firm.
Next thing you know, your sound engineers, innovators, researchers and core managers are the only internal employees of your organization. The rest are value-adding intermediaries who limit your risk and allow you to focus on what you do best.
The Advantages of Intermediaries
Building relationships with various strategic partners along your value chain can be a significant source of competitive advantage and agility in the modern, hugely fast-paced world of business. A few key advantages in a general sense include:
- Specialization and Focus – As discussed above, often one of the primary advantages of utilizing intermediaries is the ability to increase focus on a business’ core products and core competency. Additionally, whomever the intermediary is shares this advantage. As a result, organizations with many intermediaries can benefit from the specializations of their partners.
- Economies of Scale – On a per output basis, it is often the case that higher volume leads to lower costs per unit. If an organization were to build its own shipping and logistics department, the cost per shipment would almost certainly be higher than that of Fedex or UPS. These organizations have developed scale while perfecting their process, an advantage a small organization will find nearly impossible to duplicate.
- Risk Mitigation – Trying to do everything means taking all the corresponding risks that everything has to offer. For example, an organization that takes on its own accounting and financial management will incur the risk of making tax mistakes and the fines that come along with it.
- Agility – A larger organization with more moving parts, including retail, manufacturing, taxes and accounting, finance, marketing, operational management, HR, legal, database management, IT and all the other various potential requirements of modern business must face the challenge of coordinating all of these work groups towards a shared objective. This higher degree of organizational inertia is likely to significantly reduce a business’ ability to progress and adapt to change.
While there are other advantages of intermediaries depending on the situation, this chart captures the broader reasoning behind the strategy of collaborating externally to fulfill certain operational requirements.
The Cost of Intermediaries
While organizations gain advantage by collaborating with intermediaries, there are costs involved to consider.
Understand the various costs which accompany product distribution when working with intermediaries
- Distribution of goods from a provider to a consumer often includes interaction with a number of different intermediaries.
- Financial intermediaries, such as banks, enable the capital exchange behind a given transaction. This usually incurs a cost to either (or both) the consumer and the business.
- Physical storage and shipping is a resource and time intensive process, which incurs additional costs in the transaction.
- Storefronts, both digital and physical, often add a small amount to the sale price in order to cover the cost of a business’s location, staff, and other overhead.
- When considering distribution, it is important to recognize the value added by intermediaries, and the subsequent cost involved in collaboration.
- intermediaries: A third-party that acts as a go-between in a given transaction
Distribution of goods is often enabled through collaboration with partners and intermediaries. While this is generally a mutually advantageous situation, where margins are captured by all parties, it is still worth briefly exploring how a given business is impacted by the cost of collaboration.
Common Costs of Intermediaries
While the intermediaries required will differ based on the product or service being discussed, there are a few common costs which most business can anticipate incurring when it comes to product distribution:
Financial Intermediaries – Transactions are the core function of exchange in the modern economy, where a good or service is transferred for a capital payment. This capital exchange is largely governed by banks. Costs are usually incurred to one or both parties during these exchanges, often as a percentage of the overall capital exchanged.
Shipping Intermediaries – Getting an item from the business to the user often requires shipping and warehousing. This service can be expensive due to the costs of transportation, and the necessity for holding inventory at various supply centers. As a result, either or both parties will likely incur costs for this service.
Marketing Intermediaries – Storefronts, be they online or physical locations, are convenient and comfortable contact points for products and consumers. As a result of the physical location, staffing, and inventory costs incurred by the storefronts themselves, either or both parties in the exchange are likely to incur costs.
There are various other intermediaries (legal, customer support, etc.), but this provides a general framework for common areas of collaboration when bringing a product or service from the business to the consumer.
Intermediaries in Context
Let’s consider an example. A consumer goes online to purchase a new tablet. For the sake of discussion, let’s say it is a Microsoft tablet being purchased from Amazon. From the perspective of the firm which created the product (Microsoft), there are quite a few intermediaries between the consumer and themselves as a producer:
- First is the storefront the consumer purchases it from, in this case Amazon. Naturally, Amazon will have marked up the price of the product in order to maintain profitability (with some exceptions).
- Next comes the payment provider. Amazon will link you with a bank or other financial provider (i.e. PayPal, bitcoin, etc.) to process the payment. This will also incur some cost.
- Following this, we still need to get the product from Amazon to the consumer’s doorstep. Shipping and handling fees will be applied.
As is demonstrated in this example, Microsoft’s product will incur various costs, some of which will be shouldered by Microsoft, and some which will be handled by the end consumer. During this process an ecosystem emerges where mutual value is gained by all parties throughout the transaction. While these costs are relevant strategically, so too are the benefits organizations derive from the process.
Channels for Consumer Goods
Marketing channels are sets of interdependent organizations involved in making a product or service available for use or consumption.
Define a marketing channel in the modern complex distribution network
- First, the channel consists of institutions, some under the control of the producer and some outside the producer’s control. Yet all must be recognized, selected, and integrated into an efficient channel arrangement.
- Second, the channel management process is continuous and requires constant monitoring and reappraisal. The channel operates 24 hours a day and exists in an environment where change is the norm.
- Finally, channels should have certain distribution objectives guiding their activities. The structure and management of the marketing channel is thus in part a function of a firm’s distribution objective. It is also a part of the marketing objectives, especially the need to make profit.
- channels of distribution: Distribution of products takes place by means of channels. Channels are sets of interdependent organisations (called intermediaries) involved in making the product available for consumption.
With the growth of specialization, particularly industrial specialization, and with improvements in methods of transportation and communication, channels of distribution have become very complex. Thus, corn grown in Illinois may be processed into corn chips in West Texas, which are then distributed throughout the United States. Or, turkeys grown in Virginia are sent to New York so that they can be shipped to supermarkets in Virginia. Channels don’t always make sense. The channel mechanism also operates for service products. In the case of medical care, the channel mechanism may consist of a local physician, specialists, hospitals, ambulances, laboratories, insurance companies, physical therapists, home care professionals, and so forth. All of these individuals are interdependent, and could not operate successfully without the cooperation and capabilities of all the others.
Based on this relationship, a marketing channel can be defined as “sets of interdependent organizations involved in the process of making a product or service available for use or consumption, as well as providing a payment mechanism for the provider. ” This definition implies several important characteristics of the channel.
First, the channel consists of institutions, some under the control of the producer and some outside the producer’s control. Yet all must be recognized, selected, and integrated into an efficient channel arrangement.
Second, the channel management process is continuous and requires constant monitoring and reappraisal. The channel operates 24 hours a day and exists in an environment where change is the norm.
Finally, channels should have certain distribution objectives guiding their activities. The structure and management of the marketing channel is thus in part a function of a firm’s distribution objective. It is also a part of the marketing objectives, especially the need to make an acceptable profit. Channels usually represent the largest costs in marketing a product.
Channels for Industrial Goods
Creating efficient and cost-effect channels for industrial goods can create value for business-to-business exchanges.
Differentiate between consumer and industrial channels, and understand how to increase efficiency in B2B exchange
- Industrial distribution channels mostly refer to business-to-business (B2B) transactions of relatively high volume. As a result, the channel strategy tends to be a bit different than that of consumer goods.
- One of the most important decisions in a B2B channel is choosing the way goods are transported. This could be via road, rail, ship, or plane.
- Channels of exchange are also rife with intermediaries, such as logistics companies, who expedite the process of exchange.
- In industrial distribution, contracts tend to be carefully negotiated, high volume, and continuous.
- intermediaries: A person or organization in an intermediate position in a supply chain of goods or services
To understand industrial distribution channels, it’s important to realize that industrial goods generally refer to business-to-business (B2B) transactions of relatively high volume. When business enter exchange agreements, the contracts tend to involve large shipments that are repeated consistently over an agreed period of time.
With this in mind, the distribution strategy of industrial goods tends to be different than the distribution channels commonly utilized in business-to-consumer (B2C) transactions (such as retail outlets).
Industrial Channel Considerations
Generally speaking, the distribution of industrial goods is planned carefully, negotiated in advance, and focused on maximizing cost savings through effective logistics. While there are many factors that may influence channel decisions, management generally needs to determine which modes of transportation to use, how to warehouse goods, environmental requirements (temperature, for example), intermediaries, and scheduling.
Mode of Transport
Getting goods from A to B requires a mode of transportation, and each will come with various tradeoffs. For the most part, these tradeoffs revolve around speed and capacity (how fast something can be moved, and how much of it). For industrial goods, the most common options are road, rail, ship, and plane.
- Ship – Cheap, slow, and limited to places with ports, ship transportation is excellent for high volume orders with no time constraints.
- Road – The trucking industry in the United States alone is a massive undertaking, with movement of goods happening around the clock. This is great for specificity in terms of location, and tends to be fairly fast.
- Rail – Rail is an extremely cheap option, due to the low labor and resources involved. Rail, however, has the key weakness of only going where there are tracks.
- Plane – The fastest, most accurate and most expensive form of transportation, air transportation is good for transporting a small volume of goods rapidly to a specific location.
Getting goods from A to B is only part of distribution. There will also be time between using a purchased asset and receiving it. This will be in the form of storage. Storage considerations are fairly simple: where to store goods, how much it will cost, how much space will be required, and what environment they should be stored in.
Sometimes organizations use intermediaries, such as UPS or Fedex, to improve upon the logistics involved. These organizations specialize in minimizing the cost of transportation (through economy of scale), and take on the responsibility of moving, storing, and maintaining the goods as they are transported between the two bartering parties. Of course, intermediaries must turn a profit too, so the cost savings must offset the cost of the intermediary.
All and all, the channels involved in selling industrial goods between businesses are mostly about moving a high volume of goods from the producer to the buyer, often using a third party to handle the logistics.