After attaining a good channel design for the market, the channel managers job is not over. He now has to implement the channel design. The same involves 3 basic tasks :-
Identifying Power Sources Identifying channel conflicts Achieve Channel coordination Amity Business School Channel Implementation Process After attaining a good channel design for the market, the channel managers job is not over. He now has to implement the channel design. Specific channel members are likely to specialise in particular flows & activities. If the channel members do not perform properly , the entire channel effort suffers. e.g a poor transportation system can ruin a most excellent channel design also at times
Amity Business School The nature of power Power defined: Power is the ability of one channel member ( A) to get another channel member (B) do something, it otherwise would not have done. It is basically the potential to influence! For a channel manager to implement the optimal channel design, in the face of interdependence of the channel partners , of whom not all incentivised uniformly & not all cooperate to deliver their designated channel flows, the channel manager needs to possess & use channel power. A channel members power is its ability to control the decision variables in the marketing strategy of another member in the given channel at a different level of distribution Difference b/w power & co operation At times what looks like a manufacturers use of power over the distributor could simply be an act of free will, or a response to the power of environment or other players. Amity Business School Why marketing channels require power? Interdependence in channel system does not mean, that what is good for one is good for all Each channel member is seeking its own profit Maximising the systems profit is not the same as maximising each members profit
All else constant, each member tries to avoid cost at its own level or push it to the other channel member while garnering revenues. Problem of double marginalisation- involves taking of two margins rather than one in the channel. Solution can be vertical integration Amity Business School Identifying the power sources The key to determining which channel member has the most power lies in an understanding of the sources of power available to channel members. E.g Dell selling HP printers Five sources of power:- a) Reward Power b) Coercive Power c) Expertise Power d) Legitimate Power e) Referent Power
Amity Business School Reward Power A reward is a benefit given in recompense to a channel member for altering its behaviour. Financial aspect of rewards. Reward power is based on the belief held by B that A has the ability to grant rewards to B. The effective use of reward power restson As possession of some resource that B values & believes it can obtain by conforming to A s request For e.g French chain of sporting goods Decathlon Amity Business School Coercive Power Coercive Power stems from B s expectation of punishment by A if B fails to conform to As influence attempt. e.g. reduction in margins, withdrawl of rewards previously granted, exclusive territory right, slowing down of shipments. Its the reverse of reward power. Channel members view this as an attack on themselves & their businesses. Stems from great size & position in the industry. When they perceive coercion, the react by considering the counter attack Coercion should be used when all other alternatives to evoke change have proved unsuccessful E.g Gallo Wine Company coercion on its distributors Wal Mart announcement of its procurement policy led to emergence of CASE
Amity Business School Expert Power Expert Power is based on the targets perception that the influencer has special knowledge, useful expertise that the target does not possess. The value of expertise comes out more prominently in one of the most widespread channel form- franchise The durability of expert power presents another problem in channel management- what after the expertise gets transferred? To retain expert power in the long run, a channel partner has 3 options:- a) Dole out expertise in small portions b) Invest in continuous learning, thereby it shall always possess some new & important information to offer c) Transmit only customised information i.e encourage transaction specific expertise e.g supermarkets, retailers & industrial distributors have an edge over suppliers on consumer information; eg ( General Foods now Kraft Foods)- massive study of mateials handling,concept of DPP, retail space productivity,P& G s Efficient Assortment Program
Amity Business School Legitimate Power To be legitimate is to be seen as right & proper, as being in accordance with what is seen as normal or established standards. The same stems from the target companys sense that it is in some way obligated to comply with the requests of the influencer. The decision maker feels constrained morally, socially or legally to go along with the influencer Legitimate power can come from two sources : from law- Legal legitimate Power : from norms & values Traditional Legitimate power
Amity Business School Legitimate Power contd. Legal legitimate power is conferred by govts., coming from the nations law of contracts& the laws of commerce. For e.g. In many countries patent & trademark laws gives owners justification in supervising the distribution of their products, franchise contract
Another major source of legitimate power comes from the contract channel members write to each other.
In a traditional legitimate power which stems from norms, values & beliefs, a firm may believe that a channel member deserves to be accorded a certain deference perhaps because of its successful track record or exemplary management.
Amity Business School Referent Power
Referent Power exists when B views A as a standard of reference & therefore wishes to identify publicly with A A prominent reason for wishing to be publicly identified with the other is prestige Downstream channel members would like to carry high status brands to benefit their own image JC Penney almost begging Levi strauss to sell its jeans through them Harley Davidson Amity Business School The Balance of Power
Channel outcome depends on the balance of power in a relationship
Net Dependence
Dependence is never entirely one way, it is mutual. Power is to be balanced in a relationship. Net dependence should be assessed. High mutual dependence gives rise to high mutual power. Each channel member is able to create high levels of value addition. The two sides can drive each other to craft & implement creative win win solutions It also encourages cooperation by blocking exploitation, no party is weak, both are giants. The same leads to channel coordination
Amity Business School Imbalanced Dependence Exploitation inevitable? Imbalanced dependence happens when one channel member A is much more dependent than channel member B. Typically a large producer or manufacturer dealing with relatively small channel members at a wholesale or retail level has high reward or coercive power. On the other hand, you also have retail giants like Wal-Mart, Toys R Us who negotiate & exercise power on various suppliers. The balance of power favours B & A is open to exploitation The dependent party suffers in economic terms as well non economic benefits. e.g. Marks & Spencers ( Britains largets retailer) preferred suppliers
Amity Business School Imbalanced Dependence : Countermeasures for the weaker party The weaker party can take 3 counter measures : a) Developing alternatives to A b) Organizing a coalition to attack A c) Exiting the situation , removing itself from the danger by no longer seeking the benefits which A provides
e.G the U S automobile dealers; once represented only one brand of car but were eventually forced to diversify themselves Amity Business School Exercising Power: Influence Strategies The more the parties have power, the more they tend to use it
Latent power is rapidly converted to exercised power Converting the potential to influence into real changes in the behaviour of the other party requires communication. The nature of that communication affects channel relationships.
Most of the channel communications can be grouped into the following six influence strategies :- 1) Promise strategy 4)Request strategy 2) Threat strategy 5)Information Exchange strategy 3) Legalistic strategy 6)Recommendation strategy Amity Business School Influence strategies contd. Influence strategies
1.Promise 2Threat 3.Legalistic 4.Request 5.Information Exchange 6.Recommendation Power sources necessary for this to work Reward Coercion Legitimacy Referent, reward, coercion Expertise, reward Expertise reward Amity Business School Consequence of each strategy/ implications of the use of power ( General inferences) Some forms of power must be exercised to influence channel member behavior The effectiveness of various power bases in influencing channel member behaviour is most of the times situation- specific. The use of power also affects the degree of co operation and conflict in the channel & can affect the level of channel member satisfaction with the channel relationship. The first three styles (promise, threat, legalistic) often provoke a backlash because they are perceived as heavy handed , high pressure techniques. In the short term, high pressure techniques are effective, however they have damaging long term effects on the counterparts trust & commitment. Amity Business School Contd.
A promise can be considered as a bribe, as insulting & unprofessional, something of a forcing technique in the short term In the long term, it has mixed effects. The counterpart usually delivers on the promise & his & channel members financial indicators improve The last three influence strategies (request, information exchange & recommendation are more subtle more nuanced than the first three. Channel counterparts welcome these efforts and do not take offence of the usage These three strategies increase all facets of counterparts satisfaction economically & interpersonally. Recommendation strategy although more overt because the desired behaviour is stated, does not threaten the counterparts autonomy
Amity Business School Channel Conflict Nature of channel conflict
Channel conflict is a state of opposition, or discord among the organization comprising a marketing channel The many connotations of conflict :- contention, disunity, disharmony, argument, friction, hostility, antagonism, struggle, battle Interdependent parties at some level try to block each other
Amity Business School Types of conflict
Horizontal channel conflict Vertical channel conflict Multichannel conflict Amity Business School Degree of Conflict When conflict occurs at such a low level that channel members do not fully sense it, the conflict is latent in nature.Latent conflict is the norm in marketing channels. When a channel member senses that some sort of opposition exists, opposition of view points, of perceptions, of sentiments, of interests or of intentions, the conflict is perceived But when emotions enter, the channel experiences felt conflict, or affective conflict. Here channel members experience tension, anxiety, anger, frustration, hostility. Differences get personalised, normal interactions start sounding as disputes If not managed, felt conflict can escalate quickly into manifest conflict. This conflict is visible with blocking of each others initiatives & withdrawal of support.
Amity Business School Measuring conflict For diagnosing the true level of conflict that an organization faces in a channel relationship Gather 4 kinds of information :- Step 1 Counting up the issues Step 2- Importance Step 3- Frequency of disagreement Step 4- Intensity of dispute With this we arrive at the index of conflict :- Conflict = i=1 n Importance * Frequency* Intensity Amity Business School Consequences of conflict Generally considered dysfunctional,negative in terms of consequences but at certain occasions conflict actually makes the relationship better! Functional (useful) conflict are positive in their outcome. A chance to learn, innovate & grow
In a functional conflict , opposition leads to :- More frequent & effective commsunication Establishing outlets for expressing their grievances Critically reviewing their past actions Devise & split more equitable split of system resources Develop more balanced distribution of power Develop standardized ways too deal with future conflict
Amity Business School Contd. When channel members are committed, these disputes raise standards of performance in the short term encourages close co operation
Are peaceful channels better? At times what appears as peaceful & harmonious relationship might be a relationship of indifference ! The two parties dont disagree on anything & neglect becomes mutual. The relationship then exists only on paper Lack of conflict soon becomes lack of engagement that leads to poor performance ,increasing activity levels can be a solution. Amity Business School Sources of conflict
Most conflict is rooted in differences in :- a) Channel members goals b) Their perceptions of reality c) Their domains areas d) Role incongruities e) Resource scarcities f) Communication difficulties Amity Business School Competing Goals Each channel members' set of goals & objectives is different from those of other members. Goal divergence & subsequent conflict is very common Eg Resellers carry a suppliers line in order to maximise their own profits by the following ways:- a) Achieving higher gross margins per unit b) Increasing unit sales & decreasing inventory c) Holding down expenses & d) Receiving higher allowances from the manager.
But even the manufacturer wants to make greater profits? Amity Business School Contd. For this the manufacturer wishes to do exactly the reverse! a) Accept lower margins ( pay suppliers more & charge customer less b) Hold more inventory ( avoid stockouts, maximise selection), spend more to support the product line c) Get by avoiding allowances
So both collide on all objectives except one raise unit sales! Amity Business School Inherent differences in the viewpoints of suppliers & resellers Manufacturer viewpoint Reseller viewpoint Expression of clash Financial goals Maximise profit by Maximise profit by Manufacturer: You dont put enough effort behind my brand. Your prices are too high
Higher prices to reseller Higher own level margins Higher sales by reseller Higher reseller expenses Higher reseller inventory Lower allowances to r Lower expenses Faster inventory turnover Higher allowances from manufacturers
Reseller: You dont support me enough. With your wholesale prices , we cant make money Amity Business School Contd. Focus on Focus on Desired target accounts Multiple segments Multiple markets Many accounts ( volume plus share) Segment corresponding to resellers positioning. Our markets only Selected accounts those that are profitable to serve)
Manufacturer:We need more coverage& more effort Reseller.You dont respect our marketing strategy. We need to make money too. Desired products & account policy Concentrate on our product category & our brand Carry out full line
Achieve economies of scope over product Categories Serve customers by offering brand Assortment Do not carry inferior Or slow moving items Manufacturer: You carry too may lines. Dont give us enough attention, youre disloyal Reseller : Our customers come first. We need to satisfy them to benefit you. Why dont you prune your product line Amity Business School Differing Perceptions of Reality Refers to the way an individual selects and interprets environmental stimuli.One of the most common sources of conflict Different channel members respond differently to the same situation eg. perceptions may differ markedly on basic topics as:- -What the attributes of the product or service are? -What applications it serves& for which segments? -What the competition is? - Purpose of POP Inaccurate expectations also lead to surprise , and frequently opposition, when the parties fail to act as expected
Amity Business School Contd. One of the major reasons for such misperceptions is focus. Inability & lack of willingness to assemble the entire picture from separate pieces. Only when they share information they uncover dramatic differences in perception. Lack of communication exacerbates conflict Need to have frequent, timely & relevant communication to align perceptions & expectations. E.g a top manager at Toyota on regular visits to his dealers said I found out that out of ten complaints from each dealer, you could attribute five or six to simple misunderstandings, another two or three could be solved on the spot and only one needed further work Amity Business School Clashes over domain Each channel member has its own domains , or spheres of function Much conflict in channels occur when one member perceives that the other is not taking proper care of its responsibilities in its appropriate domain. Who-should-do-what-and how-should it- be-done are typical domain disputes. Classic examples of the same are :- - market research - pre & post sales service & support - inventory - pricing decision Eg J. E Ekornes, a Norwegian Home furniture manufacturer Amity Business School Contd. Role incongruities Eg role of franchisor & franchisee in a franchise Resource Scarcities Eg retention for house accounts by manufacturer market territory as a resource Communication difficulties Eg when channel partners come from different national business cultures, have culturally divergent ideas about what is appropriate behaviour. Need to develop greater sensitivity to others business culture.
Amity Business School Contd. Intra channel competition One of the most serious sources of conflict occurs when channel members compete potentially for the same business. Here the upstream member sees its down stream member as a competitor since resellers provide an assortment & pool demand of a class of products & end up stocking suppliers competition The more acrimonious disputes occur when the upstream channel member believes it has an understanding or agreement to limit competition. E.g. A California medical supply firm won almost $5mn in damages from a distributor over a breach of contract for promoting competitors products. Amity Business School Contd. From the downstream viewpoint , the domain clash occurs when supplier sells through many of the firms direct competitors in the market, e.g in intensive distribution. Another source of domain conflict occurs when multiple types of channels represent the suppliers product to the same geographical market. There are many labels for this :- -Dual distribution -Plural distribution. E.g G.E -Hybrid distribution ( Multiple channel is not the same as intensive distribution) Amity Business School Multiple Channels Earlier companies used to opt for one primary route & other routes were downplayed, even disguised in order to avoid channel conflict & avoid confusing customers. Now with the explosion of multiple channels its become more of a norm rather than exception. The reasons for the same are :- - Heightened competition - Helps increase market penetration & raise entry barriers to potential customers. - Helps serve customers efficiently in case of fragmented markets The objective is to provide convenience to customers. Amity Business School Contd. Suppliers & customers can both find each other more easily. Helps customers to pit one channel against other in search for more services at low prices. But it has some danger as well . Some of them are ;- - Downstream channel member loses motivation, can withhold support, retaliate or exit structure. - Particularly the case when customers free ride. The suppliers think that by offering multiple channels they can serve multiple segments. On paper, the same is always appealing, but the whole strategy collapses if customers refuse to stick to their assigned categories.
Amity Business School Analyzing multiple channels The basic question is , when should multiple channels be used & how much without increasing conflict to ruinous levels? Growing markets, which tends to offer opportunities to many players Markets in which customers perceive the product category as differentiated Markets in which buyers have a consistent purchase style that involves one type of channel member Markets that are not dominated by buying groups
Eg Coca Cola faced opposition in Japan from retailers on installing vending machines
Amity Business School What can manufacturers do ? Multiple channels dont always compete.They can help each other by building primary demand. E.g combination of a store & direct marketing operation Devising different pricing schemes for different channels carefully as this at times becomes legally dubious, leads to an opportunity of arbitrage. E.g. gray markets Offer more products, more service, more support, even different products to different channel types to help them differentiate themselves. E.g Xerox Offer different brand names to different channels. Sell primary flagship product line from one channel & remaining secondary or peripheral things through a captive channel. Pioneer Electronics ( IT industry) All parties should be made to realize that the environment has changed & that market has split into different segments demanding different level of service outputs Amity Business School Conflict Resolution Strategies Channel partners can cope with the conflict through 2 approaches:- - Try to keep conflict escalate to dysfunctional zone by developing institutionalized mechanisms( arbitration boards, norms of behavior etc) - Use patterns of behaviour to resolve manifest conflict ( Share information freely, gain mutual access to customers, assume joint responsibility for the total customer experience) Institutionalized Mechanisms to contain conflict early -Here channel members devise policies to address conflict in its early stages, even before it arises
Amity Business School Contd. - These policies become institutionalised. - They serve many conflict management functions. - The same includes mechanisms like joint memberships in trade associations, distributor councils & exchange of personnel programs. - Some build in appeal to third parties such as referral boards of arbitration & mediation Amity Business School Information intensive mechanisms Communication is the glue that holds together a channel of distribution Effective communication or information flow is necessary for an efficient flow of products & services through the channel. Here the emphasis is on sharing information.e.g Armstrong world industries which uses expertise power to avoid conflict Joint membership in trade associations. E.g the committee jointly founded by the Grocery Manufacturers of America, GMA, & the Food Marketing Institute that was responsible for developing the universal product code . Some channels use exchange of persons as an institutional vehicle to avoid conflict.e.g Walmart & P&G. A variation of the same is co optation. The same is a mechanism designed to absorb new elements into the leadership or policy determining structure of an organisation Amity Business School Contd. Co optation permits sharing of responsibility so that a variety of channel members feel identified & committed to the program developed for a particular service/product. It places an outsider in a position to participate in analysing an existing situation, to suggest alternatives & to take part in the deliberation of consequences. Third party mechanisms Though co optation brings together representatives of channel members, mediation & arbitration brings together third parties which are uninvolved in the channel. Amity Business School Contd. The same keeps mainfest conflict in bounds. Mediation is the process where the third party attempts to settle a dispute by persuading them to continue negotiations or provide substantive recommendations Gets a fresh view of the situation & is able to perceive opportunities which insiders cannot. Generally mediation & arbitration are supported by their own institutional framework. E.g. (CEDR) Centre of Dispute Resolution. Helps channel members increase their communication with each other regarding their goals. Amity Business School Contd.
An alternative to mediation is arbitration, wherein, a third party actually makes the decision. Arbitration can be compulsory or voluntarily In compulsory arbitration process, the parties are required by law to submit the dispute to the third party , whose decision is final & binding. In voluntary arbitration , the parties voluntarily submit their dispute to the third party whose decision is final & binding. E.g the American Arbitration association offers commercial arbitration rules. Institutionalising the practise of taking dispute to the third party forestalls conflict
Amity Business School Contd. Building Relational Norms Norms are another class of factors that serve to forestall conflict. They govern as how channel members mange their relationships & grow over time as relationship functions. A channels norms are its expectations about behaviour, expectations that channel members at least partially share. Some commonly observed norms are :- Flexibility :expectation to adapt readily to the changed environment , without obstructions Information exchange:expectation to share any & all pertinent information, no matter how sensitive the same is Solidarity :expectation from each other to work for mutual benefit. Amity Business School Styles of conflict resolution High cooperativeness Cooperativeness: Concern for the other partys outcomes Collaboration or problem solving Compromise
Low assertiveness Avoidance High Assertiveness Competition or Aggression Assertiveness: Concern for ones own outcomes
Accommodation Amity Business School Contd. Assertiveness- strength of emphasis on achieving its own goals, such as building store traffic, increasing uniqueness of its assortment, or increasing margins Cooperativeness- concern for other partys goals, such as suppliers goals of building volume, creating distinctive image, or taking share from competitor Avoidance- it attempts to prevent conflict by circumventing discussion. Attempts are to save time & unpleasntness. Neither side feels the commitment for the other. Accomodation- more focussed on other channel members goals rather on ones own. Its a proactive means of strengthening the relationship by cultivating the other channel. Signals a genuine willing ness to cooperate, encourages reciprocation. Competition-involves playing a zero sum game by pursuing ones own goals while ignoring the other partys goals. This style generates conflict, fosters distrust. Compromise- repeatedly pressing for solutions that lets each side achieve its goals. Gives something to everyone. Used to handle minor conflicts. Collaboration or problem solving- Channel member wants to achieve its own goals as well as counterparts . Win- win approach, helps build favourable self image as well as favorable public representation. Its an information intensive strategy. For this one needs to have high level of resources- especially of information , time & energy. This approach is popular in franchising.