CHAPTER ONE
INTRODUCTIONBACKGROUND 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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