No matter how well channels are designed and managed, there will he some conflict, if fur no other reason thai) that die Interests of independent business utilities do not always coincide. Channel conflict is generated when one channel member's actions prevent the channel from achieving its goal. Channel coordination occurs when channel members are brought together to advance the goals of the channel, as opposed 10 their own potentially incompatible goals.3® Here we examine three questions: What types of cnnllic'T arise in channels? What causes channel conflict? What can lie done to resolve conflict Situations?
¡Suppose a manufacturer sets up a vertical channel consisting of wholesalers and retailers, The manufacturer hopes for channel cooperation that will produce greater profits for each channel member. Vei vertical, horizontal, and niultirhanne] conflict can occur,
Vbmcfliefuirttiei conflict means conflict between different levels within the same channel. Gepernl Motors came into conflict with its dealers in trying 1o enforce policies oil service, pricing and advertising. Coca-Cola came into conflict with hot tiers who also agreed to bottle Dr, tapper.
Horizontal cluaDid conflict involves conflict between members at ihe same level within the channel. Some J 'ord car dealers in Chicago complained about other Chicago Ford dealers advertising and pricing too aggressively. Some Pizza Inn franchisees complained about other Pizza Inn franchisees cheating on ingredients, providing poor service, and hurting the overall Pi/:/.a Inn image.
Multichannel conflict exists when the manufacturer has established two oi more channels that sell to ihe same market. Multichannel conflict Is likely to be especially intense when (be members of one channel get a lower price (based on largetf Volume purchases) or work with a lower margin. When (¡oodyCar began selling its popular tire brands through Sears, Wal-Mart, and Discount Tire, il angered its Independent dealers. Ii eventually pleated them by offering exclusive tire models thai would not he sold in oilier retail outlets. Such a strategy does not always work- When Pacific Cycles purchased Schy/inn, it decided to supplement the brand's higher-end 2,700-dcaler network with some of its own channels where it sold its own mid-tier bikes through large retail chains such as Toys "R" Us. Target, and Wal-Mart. liven though Pac I fie Cycles offered exclusive models to the exisiing Sclnvinn network, over l,70n dealers pedaled away, t\ key question was whellrtt the sales gains from the big retail chains would offsei Hit loss from lire dealer defections.11'
Causes of Channel Conflict
Ills important to identify (lie causes of channel conflict, Some are easy to resolve, others are not,
One major cause is goal incompatibility, ftirfeample, the manufacturer may want to achieve rapid market penetration through a low-price policy. Dealers* in coturast. may prefer lo work with high margins and pursue short-run profitability. Sometimes Conflict arises from aiiclcar inles and rights. HP may sell personal computers io large accounts through iis own sales force, but its licensed dealers may eiIso be trying io sell to large accounts. Territory boundaries ami credit for sales often produce conflict,
Conflict can a Imp stem from differences r/p perception. I lie manufacturer may be optimistic about the short-term economic outlook and want dealers to carry higher inventory Dealers may he pessimistic. In the beverage category, it is not uncommon for disputes to arise between manufacturers and their distributors about the optimal advertising strategy. Conflict might also arise because oftfce intermediaries' dependence on the manufacturer. The fortunes of exclusive dealers, such as an in dealers, are profoundly affected by the manufacturer's product and pricing decisions. This situation creates a high potential for conflict.
As companies add channels to grow sales, they run flic risk of creating channel conflict. Some channel conflict can he constructive and lead to better adaptation to a changing environment, but too much is dysfunctional. 1 he challenge is not to eliminate conflict but to manage it better. Here's an example of how one company added a potentially conflicting e-commerce channel and still managed to build trust—not siir up conflict—with its distributors:411
Printing equ pment manufacturer AG Dick was on the verge ul bypassing an important distributor channel (or a direct ^-commerce channel, instead, liie company developed a tiered dealer model and iwmed strategic supply chain partnerships wlUi influential Distributors. AB Dick would deal directly via the WeS with all customers in a respective dealer* terntoiy tor sales of supplies. The dealer would act as the distribution point, bill and collect frcm the customer, maintain the relationship ¡n terms ot high-end equipment sales, earn incremental margins frcm the online sales of supplies (even tuoirgti the iransaction woald be direct Irom AG Dick to Ifie end user), and remain "he local contact for equipment sales. According to AB nick's Vice President of Technology, the Sealers were happy because they picket) up margin on business they neiier had, but they also picked up collections, freight, transportation, and labor. AB Dick benefited from reduced cosls per online transaction and incremental sales. It had to balance the elfitiencies and convenience of direct online ordering tor its end users with the need ■ to maintain its dealers as local imts-cf-distribulinn and customer contact.
'['here are several mechanisms for effective conflict management.41 One is the adoption of superordinate goals. Channel members come to an agreement on the fundamental goal they arc jointly seeking, whether it is survival, market share, high quality, or customer satisfaction. They usttally do this when the channel faces an outside threat, such as a more efficient competing channel, an adverse piece of legislation, or a shift in consumer desires.
A useful step is to exchange persons between two or more channel levels. General Motors executives might a^ree to work for a short time in some dealerships, and some dealership owners might work in GM's dealer policy department. 1 fopefully. the participants will firotv to appreciate the other's point of view.
Co-optation Is an effort by one organimtinn to win the support of the leaders of another organization by including them in advisory councils, boards of directors, and the like. As long as the initiating organization treats the leaders seriously and listens tu their opinions, co-optation tan reduce conflict, but the initiating organization may have to compromise its policies and plans to win their support.
Much can be accomplished by encouraging jo in I membership In and between trade associations, For example, there is gootl cooperation between I lie Grocery Manufacturers of America and the lTood Marketing Institute, which represents most of the food chains; this cooperation led 10 tlje development nf the universal product code (UPC). Presumably, the associations can consider issues between food manufacturers and retailers and resolve thetn in an orderly way.
When Conflict is chronic or acute, the parlies may have to resort to diplomacy, mediation, or arbitration. Dip¡0nincylakes place when each side sends a person or group to meet with its counterpart to resolve the conflict. Mediation means resorting to a neutral third party whn is skilled iti conciliating the two parties' Interests. Arbitration occurs when the two parlies agree to present their arguments to tine or more arbitrators and accept llic arbitration decision, Sometimes, when none of these methods proves effective, a company or a channel partner may choose lo file a lawsuit Levi Strauss and U,K, retailerTesco became locked in a legal battle beginning in 1<199.
Levi-Strauss Wed a su>t witfi the European Court of Justice against Tesco claiming the retailer's selling gf lew-juiced Levi's jeans imputed bwn oulside Britain 'undermines we product experience." Tesco had offered genuine Levis, at rgrrghly hall thrc pricc of ether (J.K. retailErs. Levi-SCraus^ af50 okjecfed to the lart that lis |ians appear h the same stores that sell produce and other food items, filler much legal wrangling. Die courts decided Ktlavor of Levj-Slrauss in November 2001. Levi-Strauss subsequently decided lo introduce a much less e*peiv Sine value ■ ne i;' Signature ¡Ears thai could he sold nn Asda strpeitirarkels in the Umled Kirn<inn. as well as in ■ i Wal-Mart in the United Stales.12
For the most ¡inri, companies a re legally free to develop whatever channel arrangements sail them. In faet, the law seeks to prevent companies from using exclusionary tactics that might keep competitors from using a channel. Mere wc briefly consider the legality of certain practices, including exclusive dealing, exclusive territories, tying agreements, and dealers' rights.
Many producers like to develop exclusive channels for their producís. A strategy in which llie seller allow? only ceilain on dels tí) carry its product; is called exclusive distribution. When the seller requires that these dealers not handle Competitors' products, this is Called exclusive dealing. Both panics benefit from exclusivo hi range merits:" the seller obtains more loyal and dependable outlets, and the dealers obtain a steady source of supply of special products and stronger sel lei' support, Exclusive arrange men is are legal as long as they do not Substantially lessen competition or tend to create a monopoly, and as long its both parties enter into the agreement voluntarily.
Exclusive dea lingo Tien (includes exclusive territorial agreements, i he producer may agree noi to sell to other dealers in a given area, or the buyer may agree to sell only in its own territory. The first practice Increases dealer enthusiasm and commitment. It is also perfectly legal—a seller has no legal obligation 10 sell through more outlets than It wishes. The second practice, whereby Hie producer tries to keep a dealer froiu selling Outside its territory, has become a major legal issue, An example of bitter lawsuits is one brought by GT Bicycles of Santa Ana, California, against the giant Trice-Costco chain, which sold ¡J.60Ü of its high-priced mountain hikes at a huge discount, thus upsetting GTs other U.S. dealers, GT alleges that it first sold the bites to a dealer in Russja and that they were meant for sale only In Russia. CiT maintains that it constitutes fraud when discounters ivork with middlemen to get exclusive goods.'13
Producers of a strung brand sometimes sell it to dealers only if they will take some or all of the rest of the line.This practice is called full-line foiting, Such tyingagrcemtiiisarenot necessarily ¡Ilegal, but they do violate U,5. law if they tend to lessen competition substantially.
Producers are free to select I heir dealers, hut their right to terminate dealers is somewhat restricted. In general, sellers can drop dealers "for cause." but they cannot drop tie ale rs if, for example, (he dealers refuse lo cooperate in a doubtful legal arrangement, such as exclusive dealing or tying agreements.
II-business describes the use of electronic means and platforms to conduct a iompany's business11 Ercommerce means that the company or site offers iq transact or facilitate the selling of producís ami services online, ¡-"-commerce has given rise til turn to e-purchasing and c-markeiing. Impure-basing means companies decide to purchase goods, services, and in for ma i ion from various online suppliers. Smart e-purchasing has already saved companies millions of dollars. E-marketing describes company efforts to inform buyers, communicate, promote, and sell ils products and services Over the Internet. The elerm is also used in terms such as e-finance, e-learning, and e-service. Hut as someone nhserved, the í will eventually be dropped ivhen most business practice is online.
We can distinguish between purere lick companies, those that have launched a Web silc without any previous existence as a fbrm, and brick~and-clkk companies, existing com puni es that Ii ave added an online site for information and.'or e-commerce.
There 3 re seven] L kinds of pure-el irk companies: Search engines, I tile met Service Providers (ISPs), commerce sites, transaction sites, content sites, and etlabier sites, Commerce sites sell all I vpes of products and services, notably bonks, music, toys, insurance, stocks. clothes, financial services, and so on. Among [he most prominent commerce sites a re Amazon, efiay, and Expedia. Commerce sites use various strategies to compete: AutoNation, a leading mc lamed larjr of car buying and related services; Hotels, the Information leader in bote I reservations: tluy.com, the low-price leader: Win esp eclat or, the single category specialist; and Hetleci.com, the inosi personalized site for skin and hair care.
The Internet is most useful for products and services when the shopper seeks greater ordering convenience [e-g., books and music) or lower cost (e.g., slock trading or news reading), It is also useful when buyers need information about product features and prices (e.g., auto mobiles or computers). The Internet is less useful for products that must he touched or examined in advance, but even this has exceptions. People can order furniture from LihattAllen.com, major appliances from SetLrs.com, and expensive computers from Hell or Gateway without trying thein in advance.
.iir DOT-CQi BUG! I'ure-clict Web businesses reached astronomical capitalisation levels in the late i990s, til some cases far exceeding the capitalization of major companies such as United Airlines or PepsiCo. They were considered a major threat to traditional businesses until the investing frenzy collapsed in 2IMJU, "Marketing Insight: Jinrst of the Pot-Com Rubble" describes the decline in dot-coin fortunes. As much as the internet boom teas over hyped- its demise may have also been greatly exaggerated. Tabid 15, displays some common misp creep [ions as to the current state of e-business and e-commerce.
Companies mtisi set up and operate their e-corntnerce Web sites carefully. Customer service is critical. Firms such lis Itii/. Camera use live online chat to give potential customers immediate advice about products for sale on their Web sites.45 Asset manager VanguLtrd's service representatives train customers to use its Web sites over the telephone, As a result, Vanguard was able to cut staff in half, an important accomplishment given lhat a phone cali to a rep cost ihc Company $9 versus pennies for a Web login,11®
BU5INE5S-TOBUSINESS .. COMMERCE Although the popular press has given the most attention to business-to-consumfeE (U2C) Web sites, even more activity is being conducted on business-to-business (B2G) sites. The B2B sites are changing the supplier-customer rcla-
TABLE 15-3 E-BttsinessPenCflplion versus fléaRiy
Profitable Internet companies are rare.
Companies ditched web etinrts amid uie lech recession.
About ol 200-plus pnt^c Nel companies made a Fourm-Qua ter profit in 2003.
Spending on e business f*0jec:s lias r sen e^ry year Since the bust. IKw comp.'is-ing 27% 0! all teeli sper-dirng.
U,S, subscriptions havE ifoubled since 2001 and are poking at 5G%. PtiKkjcU'iiy growth doubled as the Met proliferated, hut most ol Ihc acceleration was in industries that use tech a lot. surti as aulas.
The popularity o! banner ads gave way to ads tied lo search resets. boosting online advertising to $5.6 billion this year.
An investment ol SI-000 in every e-tait IPO. good or had, wou d have increased about 35%,
AltKKtgh hundreds rt B2B exciianges failed, $JJ9trilsan wwih m e-comnem was conducted in 2003.
More than 30% of pcst-liKS acceleration is in nontech industries.
Broadband has not gained traction.
Ttie productivity gain from e-business tunned out to be modesl.
Online advertising died.
IPO investors in e-lata lost lots d) money.
B?B e-commerce never really happened.
Web-era productivity gains are confined to lech companies
Sfl!i.V:; Amqlcd tramTinwtty J Md i ey.'ïhïEDiï Surprise Business^ . 1? 20Û3 w efftf^
Alihaugn the Interne! ustiereti in a new era, many businesses did not capitalize on the initial opportunities and made a host of errorg. □ttt-cijms tailed lar a variety of rea-sons: Many rusted into ite market w.tiioui proper research or pfenning. Tney had poofly designed Web sites witn ijncolerris of complexly, poor navigation, and [tow> lime. They lucked adcquaie in'raslructur C5 for sh |if: lit: on linlif ti^-d for answering cuslMnier inquiries. They believed thai the first company entering a category would win category leadership. These companies wanted 1o exoltnl network economies, namely, the- latl lhat the valtse of a nelwork to earfi of its members is proportional lo |he number oi olher users (Metcalfe's Law). Some just rushed inlo the market in Ihe hope ol launching an initial pubfc offering (JPQ) ■.'/Tile lhe markel was hci.
Many dol-coms d il not tw Id a sound business model ihal '-voukJ deliver eventual profits. The ease of etnlry Of oomjieiiiors an<J the ease o< customers suiijftiing wet) sites in search heuier prices forced them lo accept margin-killing low prices. To acquire customers, dot-corns spent largo amounis on mass market ng and offline advertising. They relied On Spin and bu^ injlead of large! marketing and wwd-oi nwJttl marketing, and fluey dc-oied loo much ellort to acquiring cusltwners inslead of building loyal and more fre-qtie<it users am&ig currcnt customers. Ihey t: !l nal understood customer behavior when ¡1 came to online surfing and purchasing
Bottom line: Ekiiloing an elective online business retires much Of Ihe same hard wock, careful planning and paliunce as a irad IKmal business.
Supx: Adapted ifom TimolfiyJ.Muflttw"The f BizSmprisi;EtsinssiWKK May 12. 2003, ppL EO-iS
lion ship in profound ways, linns arc u si tig ii£tt audio ti silcs, spot exchanges, online product catalogs, barter sites, and other online resources to oh tain betler prices.. In 2002, LendJngTree brokered 1,5 million loans on behalf of 170 lenders. Retail loans arc an ideal commodity lo trade online; l oans are highly standardized, ihe lending industry is frag' mentcd. ami large volumes of transactions allow small profit margins to add up.*'
The purpose of B3B silcs is to make markets more efficient. In ihe past, buyers had to exerl a lol df effort to gather information on worldwide supplier!, With the Internet, buyers have easy access to a great deal of information. They can get in fori nation From: fl) supplier Web sties; (2) ¡nfomeilitiries, ihird parties lhat add value by aggregating information about alternatives; (3) market makers, third parlies that Create markets linking buyers and sellers; and (-1) cusj^mer communities which are Web sites where buyers can swap stories about suppliers' products and services.'111
The net Impact of these mechanisms is to make prices more transparent. In the case of undifferentiated products, price pressure will increase, in the case of highly differentiated products, buyers will gain a belter picture of their trite value; Suppliers of superior products win he able to offset price transparency with value transparency] suppliers of «»differential ed products will have to drive down their costs in order to compete.
Many hrick-and-mortar companies have agonized over whether to add an online e-commeicc channel. Many companies moved quickly to open Web sites describing their businesses but resisted adding e-commerce to their sites. They felt lha| selling their products or services online would produce channel conflict—they would be competing with their offline retailers, agents, or their own stores.""1 Compaq feared, for example, thai its reiailers would drop its line of computers if Compaq offered to sell the same computers directly online. Merrill Lyrlch besilaled lo introduce online stock trading to compete with 1;"TRADI:, Schwab, and other online brokerages, fearing that Its own brokers would rebel. Even the store-based bookseller Harncs & Noble delayed Opening an online situ to challenge Amazon, All eventually succumbed afier seeing how much business was rushing to its online competitors.
Vet adding an e-cnmincrcc channel civaics the threat of ;i backlash from retailers, brokers, agents, and other intermediaries. The question is how to sell both ill rough irilermedi-aries and online. There are at least three strategies for trying to gain acceptance from intermediaries. One, offer different brands nr products on ihe Internet. Two, offer the offline partners higher commissions to cushion the negative impact on sales. Three, take orders on the Web site but have retailers deliver and colleci payment. Uarlcy-Havidson treaded carefully before going online.
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