Channel Conflicts

Distribution Channel
A set of interdependent organization involved in the process of making a products or service available for use or consumption by the consumer or business users. Or The process or moving product from the producer to the customers is called distribution channel. It is usually accomplished through these sequences. (producer to whole seller to retailer to customers).

PARTICIPANTS IN THE DISTRIBUTION CHANNEL

There are several types of participants that make up a distribution channel, so lets begin by listing them, as in Chapter 1 with supply chain participants. You will notice some overlap because, as also previously mentioned, retailers be- long to several (or many) different supply chains, each group focused on mak- ing and marketing different products.

Retailers
The characteristic that sets a retailer apart from other members of its distribution channel is that the retailer is the party who ultimately sells the product to its end user or consumer. As you know if youve ever shopped for anything, retailers come in many shapes and sizes, so to speak. Retailers may be grouped according to any of the following four categories: Ownership. Every brick-and-mortar retailer can be classied as a large, na- tional chain store; a smaller, regional chain store; an independent retailer; or a franchisee. stores, warehouse membership clubs, and so on. Product assortment. The breadth and depth of product lines carried by the store depends a lot on its ownership. An Ann Taylor store, for example, sells Ann Taylor branded clothing not much breadth of product line there, but extensive depth in that line. A Kmart, on the other hand, carries thousands of brands, but perhaps does not have much depth (not many brands) in any given category of product.

Service level. The more exclusive or specialized the store, the more types of services it will generally offerfrom a name-branded credit card, to on-site alterations, to liberal return policies for its loyal customers. With the big box discounters, on the other hand, customers pay for convenience and by pass traditional service, by bagging their own groceries and the like. These distinctions between various types of stores will be important as we discuss their participation in certain distribution channels

Wholesalers
Wholesalers are intermediaries or middlemen who buy products from manufacturers and resell them to the retailers. They take the same types of nancial risks as retailers, since they purchase the products (thereby taking legal responsibility for them), keep them in inventory until they are resold to retailers, and may arrange for shipment to those retailers. Wholesalers can gather product from around a country or region, or can buy foreign product lines by becoming importers. The term wholesale is often used to describe discount retailers (as in wholesale clubs), but discounters are retailers, not technically wholesalers. And in B2B channels, wholesalers may be called distributors. Agents and Brokers Agents (sometimes called brokers) are also intermediaries who work between suppliers and retailers (or in B2B channels), but their agreements are different, in that they do not take ownership of the products they sell. They are independent sales representatives who typically work on commission based on sales volume, and they can sell to wholesalers as well as retailers. In B2B arrangements, this means they sell to distributors and end users. Resident sales agents are good examples in retail. They reside in the country to which they sell products, but the products come from a variety of foreign manufacturers. The resident sales agent represents those manufacturers, who pay the agent on commission. A resident sales agent does not always have merchandise warehoused and ready to sell, but he or she does have product samples for which orders can be placed and is responsible for bringing the items through the importation process.Retailers that dont have the money, time, or manpower to send someone overseas for manufacturers site visits to check out the new product lines can depend on a resident sales agent to do the job. Buying ofces can also be considered a type of agent or broker, since they earn their money pairing up retailers with product lines from various manufacturers.

The Need for Distribution Channels

Why are all these layers needed in distribution? Why cant a producer simply sell to a retailer, who sells to a consumer? Its a fair question, and in some cases, that is exactly how it happens. But the fact is that many producers are either too small or too large to handle all the necessary functions themselves to get their products to market. Consider the small, specialty manufacturer who is terric at making ne leather handbags but may not have the expertise to market its products as well as it makes them, or they may not have the money to hire a team of full-time salespeople to court the customers and secure the orders. An intermediary who works for several small, noncompeting rms can easily handle those functions cost-effectively. An intermediary who specializes in importing and exporting can handle the intricacies of customs paperwork, overseas shipping, and foreign markets, too. Conversely, large companies need intermediaries because they are also in the business of manufacturing, not marketing. Turning out tens of thousands of cases of soft drinks, for instance, do you think Pepsi has time to take and ll individual orders from households? Channel members like wholesalers and retailers are useful because they are best at specic aspects of sales in their markets, leaving the manufacturers to do what they do bestwhich is turn out the best possible product. Having a distribution channel breaks the whole buying and selling process and all its related negotiations into manageable tasks, each performed by companies that specialize in certain skills. Using an import wholesaler, for example, can be handy because they know the laws and customs of the suppliers nations; and they generally offer their own lines of credit so the retailer wont have to deal with currency exchange or negotiate payment terms with a bank in another country. Another advantage of the distribution channel is its ability to even out the natural ebbs and ows of a supply chain. This comes from the ability of some channel members to store excess goods until they are needed, and to stockpile goods in anticipation of seasonal sales peaks. Depending on how close their relationships, channel members may also work together to purchase goods or services in greater quantity at discounts, passing the savings on to customers. Even for consumers, the distribution chain is handybeyond handy, in fact! It has become a necessity in our society. What if there were no supermarkets, for instance? Can you imagine how much more time and money you would spend having to buy every item at its source? How practical would it be to run out to the nearest farm to pick up a quart of milk and some salad ingredients on your way home from work?

Marketing Channel
Often the question comes up, what is a channel? A channel to market is the method of getting your product into the customers (the end users) hand. This can either be through direct sales, or through a reseller. Direct sales can occur in person, via the phone, the web or mail. Indirect, or channel sales typically refers to sales through a reseller. A reseller can order from you direct (one tier between you and the end user), or from a wholesale distributor--you would sell to a wholesale distributor and they in turn would sell to multiple resellers (two tiers between you and the end user (hence the common term two-tier distribution)). Note: some companies or divisions (i.e., Motorola semiconductor, etc.) call the reseller the distributor (or disty)--this is correct, but not in the typical and more common two-tier distribution model. Hence, it is important to get the channel terminology down whenever talking about the channel--or you could be in violent agreement, and not know it.

TYPES OF CHANNELS
Companies can design their distribution channel to make products and services available to customers on different ways. These include direct and indirect marketing channels. Direct Marketing Channel A marketing channel that has no intermediary levels. 0-Level: Manufacturer Consumer

Indirect marketing channel A marketing channel that has one or more intermediary levels. 1- Level: Manufacturer 2-Level: Manufacturer 3-Level: Manufacturer 4-Level: Manufacturer Retailers Wholesaler Wholesaler Jobber Consumer Consumer

Retailers Consumer Retailers Consumer

How Channels Are Chosen

Although retailers drive distribution channels, it is not usually the retailer who makes the decision to utilize one channel over the others. The producer of the product makes this decision. There are several characteristics of product lines that make them more or less appropriate for a particular type of channel. Briey, these characteristics can be summarized as follows: The products themselves. If a product is perishable, like many grocery items, it requires the shortest, most direct distribution channelwhich means the fewest possible intermediaries along the way. If a product is customized, like an expensive assembled-to-order computer system, it also benets from a short distribution channel. There is no need for intermediaries when a customer orders a custom product directly from the company that makes it. Long distribution channels correspond to small purchases, either because the retailer doesnt carry much inventory or the consumer buys the item in small quantities. The type of customer.Who are the customers, what do they need and expect from their shopping experience, and where are they willing to go to buy this type of product? How much quantity do they buy at a time? A channel may be chosen because it best reects the end users buying habits. Business-tobusiness customers have completely different needs and buying habits than individual consumers. Market size. This factor encompasses two things: the population of an area and whether it is urban or rural. It is easier to sell direct to customers in a large city with lots of potential outlets for a product line. The more widely dispersed the stores, the more logical the dependence on agents and wholesalersor on multiple retailers in different citiesto keep product sales strong and steady. The producers level of control. Most top-dollar clothing designers and fragrance manufacturers do not want their products showing up anywhere and everywhere. Theyve worked hard to build an exclusive reputation, and they expect their distribution channel to work just as hard to protect and enhance their upscale image. These producers will choose a distribution channel that ensures no discount merchants have access to their lines, and they will count on the members of their channel to honor their wishes and not make bargain deals. The size of the producing company. A producer is likely to sell direct when the company is large enough to handle the additional responsibilities that intermediaries would otherwise providecredit to customers, ware- houses for their own goods, the ability to hire and train their own sales representatives. Smaller producers require a larger distribution chain in order to ll these roles. The size of the retailers. A segment of the industry that is fragmented,with most of the stores operating as single units, requires the distribution channel to be longer. This was the case in the 1980s with video rental stores, for example, until Blockbuster Video opened and began its climb to dominate the market.

Types of Distribution within Channels

The channel members may handle different portions of the transaction, but they must all agree on the end resultthat the product(s) will be placed in the market in the manner desired by the producer or manufacturer, and that placement of the product(s) meets the contractual agreements of producer, retailer, and everyone in-between. Once a channel is selected, the distribution strategy can take three different forms. They are listed as follows, from most restrictive to least restrictiveand remember, in retail, the term restrictive does not automatically have a negative connotation. Exclusive distribution is thought of most frequently for high-dollar products such as luxury cars or Rolex watches, but the fact is that even small-ticket items like toys are considered exclusive when they are in high demand. In an exclusive distribution agreement, one retail store or chain of stores has the legal right to market and sell the product line in a geographic area. Exclusive distribution is sometimes requested by the retailer, not the producer, to ensure that the retailer has something unique, that customers cant get anywhere else. This may also mean the retailer commits to not selling any products that are going to compete with the line. In exchange, the producer or manufacturer offers sales assistance, training, point-of- purchase materials, and other perks to the exclusive distributor. Such a distribution arrangement can work toward the exclusive image of the product (because its harder to get), the retailer (for having the only ones available), and the manufacturer (by implying that the company is interested in marketing quality, not quantity.) In B2B commerce, exclusive distribution works well for extremely specialized product lines, such as heavy equipment or high-tech products, ordered to the customers specications and budgeted for in advance of the purchase. Selective distribution means the retailers are carefully screened, and only a few are permitted to carry the product line. As with exclusive distribution, part of the goal here is to enhance the image of the product by making it harder (but certainly not impossible!) to obtain. This allows the retailer to charge full price. The ladies clothing industry is full of selective distribution agreements between designer labels and so-called ner department stores. (The producers may have other, lower-priced merchandise lines to sell to discounters; but these are generally sold under separate, secondary brand names.)

What is channel conflicts

Channel conflict concerns the relationships between production and sales. The Internet has made it possible for firms to sell to customers directly, thereby cutting out retail. For this reason, another word for channel conflict is disintermediation. Ultimately, the Internet is closing the gap between buyer and seller. Features The primary feature of channel conflict is the existence of the Internet and email. Adding to this the highly professional and prompt delivery systems of UPS or Federal Express, the world of retail seems to be dying. Function Channel conflict means that manufacturers can deal with customers directly. If this is increasingly the case, then retail is being replaced with customer service, an entirely different thing. In this case, customer service agents can work directly within the manufacturing center, eliminating the need for separate retail establishments and therefore are much cheaper. Effects Manufacturers are now being forced to abandon long-term and formerly profitable relationships with salesmen and other distributors. Buying paper from a salesman used to earn that salesman a commission. There is no commission when the client buys from the firm's new, user-friendly website. From the point of view of economics, the older retail system of distribution no longer makes financial sense. Benefits Channel conflict, if nothing else, is a boon to consumers. In the traditional retail arrangement, the price of goods bears scant relation to the cost of production, even including the profit to the manufacturer. Commissions and sales staff needed to be paid, as well as other forms of overhead, thus driving up the price of goods. In the world of channel conflict, these costs are largely eliminated, meaning cheaper goods bought online directly from the manufacturer. The only new added cost is that of transport. Furthermore, people can now buy things because they truly want or need them, rather than being manipulated by a salesman caring only about commission.

Considerations Rather than being a disinter mediating function, channel conflict might merely empower a new set of intermediaries, though of a very different stamp. If ecommerce is to become the norm, then firms, such as UPS or Federal Express, now become the new commission earners in the new economy. Furthermore, firms such as PayPal, Internet security firms and network engineers now have a new purpose within the economy. The big difference here is while the old retail network was based around commission, the newer intermediaries are general service providers. In other words, Internet engineers would always be needed even if there were no such thing as e-commerce. Only now, such jobs are an integral part of the new economy.

Types of Chennal Conflicts

Horizontal Channel Conflict

In this type of channel conflict, a manufacturer not using third-party retailers faces a struggle between two of its own sales divisions, such as its online and offline departments. Usually one division starts to cut into the sales and profit of the other division, devaluing the latter. Horizontal channel conflicts occur between two departments on the same level of importance. Or Horizontal conflict occurs among firms at the same level of the channel. For instance some Ford dealers in Chicago might complain the other dealers in the city steal sales from them by pricing too low or by advertising outside their assigned territories. Or holiday Inn franchisees might complain about other holiday inn operators overcharging guests or giving poor services, hurting the overall Holiday inn image. Vertical Channel Conflict Vertical channel conflict arises when manufacturer tries to sell on their own while still maintaining working relationships with third-party retailers and distributors. This leads to competition for sales where retailers and distributors often get lower profits for selling the same product or service as the manufacturer is selling. Since it is primarily the retailers and distributors role to build awareness of the product, this can lead to an overall decrease in sales. This situation is called a vertical channel conflict because it affects two different levels of business, thirdparty sales and bottom-line sales. Multilevel Channel Conflict

Multilevel channel conflicts arise when a manufacturer creates competition between its own sales and promotion arms, while also having business relationships with third-party retailers and distributors. The reason for this approach may be to aggressively and more quickly expand its sales and promotion network, but it can create both internal and external discord between the various divisions and third-parties.

Causes: Channel conflict is an extremely difficult and potentially destructive marketing channel strategy and management issue. Causes of channel conflict include:

Structural factors - badly designed channel structure and alignment to customer segments. The use of multiple channels (direct and indirect) and the inclusion of new or emerging channels without appropriate planning, Resource scarcity - too many channels (or channel partners) compete for too few customers, Goal incompatibility - the channel principal and channel partners have incompatible or misaligned goals, Poorly defined roles and responsibilities - the channel principal and channel partners' roles and responsibilities are unclear or not matched to their capabilities. Communications difficulties -goal incompatibility, perceptual differences and role incongruities may be caused by communications problems,

Poor channel management - unstructured channel management processes, such as partner recruitment, pricing structures, incentive systems and promotional strategies can all lead to channel conflict, Weak channel performance assessment - channel principals fail to drive the desired channel-behaviour through clearly defined performance targets and roles. Enforcement of performance standards is weak.

What are the consequences? Destructive channel conflict can have serious consequences on channel efficiency, channel effectiveness and channel partners' and principals' profits. Such consequences lead to significant channel partner churn and low partner loyalty to principals. These consequences will lead to a negative impact on customers' purchasing behaviours. However, some channel conflict is desirable, provided it is well managed. A lack of horizontal channel conflict indicates weak market coverage. Well managed channel conflict is better defined as channel competition and is not destructive. How to manage channel conflict: Some channel conflict is the result of emerging new channels such as the Internet. While excessive channel conflict can cause destructive behaviour, the solution is not in simply eliminating all channel conflict, but includes: optimizing market coverage, and
managing conflict constructively It is necessary to determine whether the decline in channel performance is: a result of conflict with other channels, destructive to overall profitability In these circumstances, strategies to manage channel conflict include:

1. Designing the channel structure to reflect the products/services being sold, customers' needs, locations, customers' buying behaviours and the profitability of each transaction; 2. Establishing mutually agreeable and aligned business goals with the channel partners; 3. Effective communications - Take every opportunity to communicate with channel partners, eg include channel partners in business planning

events; 4. Segment customers and align channels according to their ability to meet specific customer segment needs; 5. Encourage specialisation among channel partners, and create customer segment specific campaigns and align these with specific channels; 6. Clearly define channel roles and responsibilities, and use pricing solutions, rebates and incentives to encourage desired performance; 7. Develop specific channel products or offers which are not available to all channels; 8. Check behavioural performance through role audits, and regularly monitor channels for early warning signs of damaging behaviour; 9. Ensure that partner agreements are clear and exercise your rights when necessary. Summary: Channel conflict can have many causes and result in profit erosion. However, not all channel conflict is unhealthy and can be incorrectly confused with channel competition. Some channel conflict is a consequence of optimising market reach and market penetration. To manage channel conflict, it is necessary to assess whether such conflict is leading to a fall in channel, channel partner or principal profitability. There are many proven strategies to deal with channel conflict based on an evaluation of the root causes rather than the symptoms.