CHANNEL CONFLICT IN BUSINESS ECONOMICS



CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
Although the implicit or explicit paradigm underlying relationships within and across distribution channel is cooperation, conflict is a common and indeed inherent paradigm as well for channel relationships (Stern and Gorman:1969). The reason for this is a very basic human one: when people relate to each other in any kind of organization including a channel of distribution, at some point, one or more of the parties will engage in behavior that impedes the other party’s goals. This is the essence of conflict. So, for example, if a retailer heavily promotes its own private brand products and ignores or even disparages the manufacturer’s brand, the manufacturer may feel that the retailer is impeding the attainment of the manufacturer’s sales goals. This is a typical example of conflict within the distribution channel. Cross channel conflict occurs when different channel structures clash. A common example of this is when a manufacturer uses its direct online channel to reach the same consumers being served by independent retailers carrying the manufacturer’s products. In this case, the cross channel conflict is between the manufacturer’s direct online channel and the indirect retail channel (Rosenbloom: 2007).

In general, channel conflict whether within or across channels is viewed as a negative phenomenon in the sense that it reduces channel efficiency. In some instances, however, conflict can be a positive force if it fosters a more optimum allocation of distribution tasks among channel members. More typically, channel managers seek to mitigate conflicts once they arise or attempt to avoid conflict as much as possible. The wide scope of distribution channels associated with international markets has not changed the basic dynamics of conflict within and across distribution channels. On the contrary, the different backgrounds and cultures of channel members at the distributor and retailer levels in different countries have increased the potential for conflict. Moreover, with the arrival of online channels as a channel option for many firms to reach their customers directly, the potential for cross channel conflict has been magnified. Consequently, channel managers will need to pay even more attention to the channel conflict paradigm. While channel conflict, being an inherent behavioral dimension associated with distribution channels, cannot be eliminated, it can be managed. Such management of channel conflict should occur at two levels: 1) during the design stage and 2) during the administration of existing channels and numerous others (Rosenbloom; 2004). One of these ‘other’ variables is the possible emergence of conflict within the channel or in the case of a multi-channel design, across channels.

STATEMENT OF THE PROBLEM:
Channel conflict like horizontal channel conflict boils down to a question of economics: that is where retailer profits are pushed below acceptable levels as a result of direct or indirect competitive behaviors. More specifically, when multiple channels are employed and distribution intensity increases, three profit threats may confront a retailer: sales cannibalization, margin dilution, and customer diversion
The existence of the Internet and email and adding to this, the highly professional and prompt delivery systems of UPS or Federal Express, the world of retail seems to be dying.

OBJECTIVES OF THE STUDY:
To determine how manufacturers can respect the system economics, by recognizing that channel partners must earn fair financial returns to stay motivated.
To determine whether delineating clear rules for territorial coverage and "account  ownership" competing channels (including the manufacturer direct channel) will avoid fighting over the same set of customers.

SIGNIFICANCE OF THE STUDY:
This seminar paper will be of benefit to marketing practitioners in understanding why channel conflict exists and how to manage them whenever they occur.  
Secondly, it will serve as reference material for academia’s who may wish to seek ways of improving the problems associated with channel conflict in international marketing practice and/or domestic marketing practice.

CHAPTER TWO
LITERATURE REVIEW
Marketing is a business function whereby consumers’ needs and wants are determined and satisfied using the resources of a firm for a profit while fulfilling the social responsibility of the firm to its environment. Nnolim D.(1994). It has four specific but integrated functions which are in the form of product, pricing, distribution and promotion. The management of these functions is backed by an information system that is constantly fed with information from marketing research activities on the task, competitive and macro public environments. In domestic marketing, these functions are carried out within a geo-political entity while in international marketing, the marketing functions are executed across national boundaries by the firms. A firm which is engaged in international marketing is by that fact engaged in international business.
International marketing is important in the role it plays to raise the standard of living of the world community just as domestic marketing raises the standard of living of  the domestic community. This is possible through goods and services which flows from area of surpluses to scarcity.
International marketing enhances a nation’s chances of maintaining a positive net trade balance. Nigeria is currently engaged in a sustained bid to increase its international marketing activities in the area of manufactured goods. The aim is to earn more foreign exchange to develop her industrial base and raise the standard of  living of the average Nigerian   
International marketing or International business is a term used to collectively describe all commercial transactions (private and governmental, sales, investments, logistics, and transportation) that take place between two or more regions, countries and nations beyond their political boundaries. Usually, private companies undertake such transactions for profit; governments undertake them for profit and for political reasons (Daniels, J., Radebaugh, L. and Sullivan, D. :2007). It refers to all those business activities which involve cross border transactions of goods, services and resources between two or more nations. Transaction of economic resources include capital, skills, people for international production of physical goods and services such as finance, banking, insurance, construction and so on (Joshi, Rakesh and Mohan: 2009).
MEANING OF CHANNEL CONFLICT
Channel conflict concerns the relationship 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 buyers and sellers.
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. 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.
HOW CHANNEL CONFLICT OCCURS
 Containing channel conflict is a critical distribution strategy objective.  Given that their prospective profitability is the primary reason that retailers carry products, projected profit margins and sales volume are critical variables.
On a macro basis, a product's inherent market value drives customer demand and largely determines aggregate sales volume and average pricing. On a more micro basis (i.e. from the perspective of a specific retailer), sales are a share of the total sales volume in a specific trading area and margins are a direct function of prevailing (or lowest prices) offered by competing retailers.
Channel conflict occurs when manufacturers (brands) disintermediate their channel partners, such as distributors, retailers, dealers, and sales representatives, by selling their products directly to consumers through general marketing methods and/or over the internet through e-commerce.
Some manufacturers want their brands to capture the power of the internet but do not want to create conflict with their other distribution channels, as these partners are necessary and viable for any manufacturer to maintain and gain success. The Census Bureau of the U.S. Department of Commerce reported that online sales in 2005 grew 24.6 percent over 2004 to reach 86.3 billion dollars. By comparison, total retail sales in 2005 grew 7.2 percent from 2004. These impressive numbers are attractive to manufacturers, however they have not been able to participate in these sales without harming their channel relationships.
Despite the rapid growth of online commerce, an estimated 90 percent of manufacturers do not sell online and 66 percent identified channel conflict as their single biggest issue hindering online sales efforts. However, results from a survey show that click-and-mortar businesses have an 80% greater chance of sustaining a business model during a three-year period than those operating just in one of the two channels. Among others, the reach will be enhanced by creating another selling channel. Nowadays, e-commerce wins in popularity as second distribution channel, because of the low overhead expenses and communication costs. Their advantage is at the same time their disadvantage, since consumers can communicate less expensive and more easily with each other too. Therefore, price and product differentiation is getting tougher than ever (Marmorstein, H., Rossomme, J. and Sarel, D: 2003).
Channel conflict can also occur when there has been over production. This results in a surplus of products in the market place. In addition, newer versions of products, changes in trends, insolvency of wholesalers and retailers and the distribution of damaged goods also affect channel conflict. In this connection, a company's stock clearance strategy is of importance. To avoid a channel conflict in a click-and-mortar business, it is of great importance that both channels are fully integrated from all points of view. Herewith, possible confusion with customers is excluded and an extra channel can create business advantages.

Types of channel 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. The implication is that the intensity of competition among retailers is a major driver of retailer support (or lack thereof).  Invariably, as a product's distribution base is broadened (more accounts, stores, and types of stores are added), the likelihood of horizontal channel conflict increases between and among organizations operating in the same "layer" of the distribution network.  As channel conflict increases, retailers' support for a product typically decreases.  While channel conflict can rarely be eliminated completely, it is critical to contain it.
In most instances, horizontal channel conflict boils down to a question of economics: retailer profits are pushed below acceptable levels as a result of direct or indirect competitive behavior. Horizontal channel conflict is increasingly common in real life as companies attempt to reach different customer segments by utilizing multiple distribution channels (including direct from the manufacturer).
More specifically, when multiple channels are employed and distribution intensity increases, three profit threats may confront a retailer: sales cannibalization, margin dilution, and customer diversion. The following cases may be considered:
 (a)  A mature, commodity-like product is sold through traditional grocery stores that attempt to maintain margins at roughly 30%.  The manufacturer makes a comparable product available through warehouse club stores that price to operate at 5% margins by maintaining a very bare bones overhead structure.
 (b)  A broadly distributed, heavily advertised, branded product becomes a "traffic builder" for some retailers.  That is, they price the product at or below cost to attract customers to their stores, hoping that the customers will also purchase other higher margin merchandise.
 (c)   A new, complex product is introduced though a selected group of specialized retailers who compete on service (i.e. front-end consultive selling) not price.  As volume builds for the product, similar versions are offered through "category killer" discounters who offer no in-store service and compete based on low prices.
 (d)  A manufacturer that has traditionally sold its products through full-service specialty retailers decides to have its sales force call directly on particularly large customers, bypassing the retailers, and decides to hop on the e-commerce bandwagon by selling to price-sensitive customers via the internet at "factory direct" prices.
 In all of the above cases, there is the potential for significant channel conflict that is virtually certain to deteriorate retail economics (i.e. lower sales, prices, and profits), which may result in a reduction of aggregate support for the products. In case (a), if the grocery stores don't narrow the price spread, they will have some of their sales cannibalized by the warehouse stores and will likely lose market share since the market is mature (that is, slow/no growth).
 In case (b), all retailers are likely to suffer margin dilution to the extent that they cut prices (either on an everyday or promotional basis) in an attempt to maintain their market shares. In case (c), the full service stores may have some of their customers diverted to the discounters.  That is, customers may take advantage of the pre-sales service, but then buy at the low price outlet.  Or the stores may suffer margin dilution if they accede to customers who benchmark against "low-balling" competitors and negotiate lower prices. This customer practice is commonly referred to as "best-balling" that is negotiating based on the lowest price found in the market. Case (d) is often the most controversial and emotional of the channel conflict situations since the manufacturer is involved.  The specialty store may be hit by a profitability triple threat: some sales will be cannibalized by the manufacturer's direct sales force; some full-service customers will be diverted to buy directly from the manufacturer; and margins will be diluted if prices are reduced to match the factory direct prices.
 In both cases (c) and (d), the full service retailers are likely to become economically de-motivated and shift their sales attention to more profitable products.  As a result, the product may lose its primary sources of market support. As the above cases illustrate, the dominating distribution objective, broadening market coverage (that is, increasing customers' convenience), is somewhat at odds with the other two - enlisting product support and avoiding channel conflict.  While a company may want broad rather than selective distribution, and may want to attack different market segments though multiple channels of distribution, the stark reality is that intensive hybrid distribution may, if not very carefully managed, result in horizontal channel conflict, deteriorating retail economics, and eventual loss of critical retail-level product support.

Vertical Channel Conflict:

Vertical channel conflict arises when manufacturers try 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, third-party 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 aggressive 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.

Dangers and Effects of Channel Conflict:

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.
Although the ultimate aim of any business is to avoid the creation of channel conflicts, sometimes they do occur. The practice of conflict regulation and control is known as channel conflict resolution, and is considered to be a branch of strategic business management. If manufacturers do not recognize channel conflicts quickly, the sales bottom-line will be adversely affected. To resolve a channel conflict, manufacturer's may need to temporarily change their approach to create a more level playing field for all parties involved. Without expedient resolution of channel conflicts, dissatisfaction in the internal workforce and third-party disloyalty may arise.

Benefits of channel conflict:

Channel conflict, if nothing else, is a boon to consumers. In the traditional retail arrangement, the price of goods bear 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.


Mitigating Channel Conflict:
While some level of channel conflict is inevitable, especially as products mature, it can be (and should be) mitigated. In order to contain the level of conflict, companies need to embrace distribution philosophies that:
 (1) Adopt a long-run perspective and refrain from opportunistic initiatives that may jeopardize established channel relationships for the sake of potentially transient short-term gains.
 (2) Are respectful of system economics, recognizing that channel partners must earn fair financial returns to stay motivated.  
 (3) Stay open and flexible by avoiding restrictive long-run agreements (formal or "common law") that foreclose adaptation to changing markets.
 On a more tactical level, companies should:
 (1) Avoid premature distribution through margin-crunching channels despite their sometimes alluring potential to satisfy the "thrill of volume".
 (2) Delineate clear rules for territorial coverage and "account ownership" so that competing channels (including the manufacturer direct channel) avoid fighting over the same set of customers.
 (3) Build and maintain "fences" between competing channels to minimize leakage.  For example, many companies market different brands to different intermediaries, or offer derivative models that are similar to, but different from their base products, that match the needs of different channels (e.g. newest full featured models to specialty stores, older "stripped down" models to discounters), and that "shelter" retailers from head-to-head price competition.
Channel Design and Conflict Management:
 The design of global distribution channels is a complex process involving several stages of planning and analysis as well as the consideration of numerous variables that can affect the channel. Such variables are the nature of the market segments being targeted, the types of products being marketed, the availability of intermediaries designing global distribution channels need to consider the issue of conflict as an integral part of the channel design process and try to develop channel strategy and structure that will reduce the emergence of conflict or mitigate its effects. For example, if the firm plans to use both direct online channels as well as independent intermediaries to sell its products in overseas markets, a channel strategy that minimizes territorial overlap can reduce the potential for conflict. Or, if both channels will be distributing products in the same territories, a commission scheme that shares revenues from online sales with independent distributors can go a long way toward mitigating cross channel conflict.
Managing Conflict in Existing Channels:
When channels have already been designed with the basic channel structure in place, and no basic channel restructuring is planned, channel managers do not have the option of ‘designing out’ channel conflict through changes in channel structure, at least not in the short run. Therefore, conflict has to be dealt with in the normal course of channel management. Essentially this involves three stages or phases: 1) detecting conflict, 2) appraising the effects of conflict, and 3) resolving the conflict. With regard to detecting conflict, the emergence of channel conflict is not always obvious. It can be more subtle and hidden. The channel manager must therefore be vigilant to detect channel conflict before it becomes a major problem. In global channels where distances are great and multiple channels can be long and complex, the challenge of spotting conflict early is greater. Formal surveys and audits of channel members may be needed to detect conflict at an early stage.
With regard to appraising the effects of channel conflict, the channel manager needs to make an assessment as to whether the conflict is likely to have a negative impact on the firm’s distribution objectives. If so, some action will need to be planned and implemented to address the conflict. Finally, options for resolving conflict can range from informal meetings between the parties to the conflict, perhaps over lunch, all the way to bringing legal action seeking resolution through the courts (Dant and Schul, 1992). Obviously, and hopefully, early detection of channel conflict and a realistic plan for dealing with the conflict will forestall the need to pursue the more extreme option of taking legal action.

CHAPTER THREE

RECOMMENDATION:

Rather than being a "disintermediating" function, channel conflict might merely empower a new set of intermediaries, though of a very different stamp. If e-commerce 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.
CONCLUSION:
From the standpoint of global marketing channel strategy, the disintermediation paradigm should not be ignored but neither should it be taken at face value. That is, the wide array of intermediaries or middlemen from traditional merchant wholesalers and retailers as well as export merchants, manufacturer’s export agents, resident buyers, export commission houses and numerous others are not likely to be ‘disintermediated’ anytime soon. Rather, a reconfiguration or reintermediation based on the laws of economics is the more likely outcome for international marketing channel structures. Consequently, channel managers operating in the global arena, rather than focusing on eliminating intermediaries, should instead attempt to design marketing channels that incorporate an optimum mix of intermediaries capable of enhancing channel efficiency.
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