Channel Management

& Bargaining Theory

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White Paper Written By: Rajat Gupta MBA2(IB)

Punjab College of Technical Education

Channel

‘Path or pipeline’ through which goods and services flow in one direction (from vendor to consumer), and the payments generated by them flow in opposite direction (from consumer to vendor).

The Network of partners in the value chain that cooperate to bring products from producers to ultimate consumers.

A group of individuals and organizations that direct the flow of products from producers to customers.

A set of institutions necessary to transfer the title to goods and to move goods from the point of consumption.

Channel Members

All those who help in bringing product to the consumer from the manufacture. Types of Channel Members

Agents/Brokers o Channel partners that match marketers with wholesalers or in organization

markets, with customers

Wholesalers o A wholesaler is someone who primarily sells to other retailers o Also may retail on own o Typically, buys in bulk

Retailer

o The most visible face of the distribution system o India has the largest number of retailers in the world

Value-added reseller

o channel partners that buy products from marketers, add value by modifying or enhancing value, then reselling them

o EXAMPLE - Vehicle dealer adds several accessories Functions of Channel Members

Research Promotion Market contact Making Products Available Physical possession and distribution Financing

Risk Taking Providing Value-Added Services Negotiation Storage

Types of Channel Four Channels through which marketers can reach customers

Channel 1 Channel 2 Channel 3 Channel 4 Manufacturer Manufacturer Manufacturer Manufacturer Agent Wholesaler Wholesaler Retailer Retailer Retailer

Customer Customer Customer Customer

Some Other Types of Channel

Multilevel Marketing - A sales system under which the salesperson receives a commission on his or her own sales and a smaller commission on the sales from each person he or she convinces to become a salesperson. This is called Dual Distribution or Hybrid Distribution. Companies like Amway, Tupperware follows this channel.

Strategic Channel Alliances – an agreement whereby the products of one organization are distributed through the marketing channels of another. It is common in the International market.

Channel Creation process

Analyzing customer needs- The marketer must understand the service output levels desired by the target customer.

Establishing channel objectives - Channel objective vary with the product characteristics

Identifying major channel alternatives – a. the types of available business intermediaries

b. the no. of intermediaries needed- Exclusive distribution, Selective distribution, Intensive distribution

c. the terms & responsibility of each channel members- price policies, conditions of sale, territorial rights

Evaluating the major alternatives – a. Economic criteria

b. Control & adaptive criteria Testing – After evaluating, testing is done in real market Implementing - Finally best suited channel is implemented and followed up. Business Plan – While designing channel one has also consider how much its going to

cost i.e. how much price get increased when it reach final customer and what its profit margin, how much is return on investment to the manufacturer and how much intermediaries(if any) is earning.

Contract Modalities – One also has to consider what sort of legal restriction will there while dealing in that particular product/industry. What sort of legal barriers or conflicts can occur while choosing particular channel.

Channel Conflicts

Channel conflict is generated when one channel member’s action prevent the channel from achieving its goal.

Channel conflict occurs whenever channel members have distinctly different opinions or perceptions about distribution channel affairs. If no interdependence exists, there would be no basis for conflict. Mutual dependence creates the basis for conflict

Types of Channel Conflict

Vertical channel conflict:

Occurs amongst different levels within a channel of distribution Horizontal channel conflict:

Occurs amongst similar firms at the same level in a distribution channel. Multi-channel conflict:

Occurs amongst different intermediaries at the same level in a channel. Differs from horizontal in that bit occurs among dissimilar institutions.

Causes of Channel Conflict

• Goal incompatibility – Though channel members share the common goal of maximising their joint effectiveness, each is a separate legal entity.

• Each has its own employees, owners and interest groups who help shape goals and strategies, some of which may not be totally compatible with those of other channel members.

• This incompatibility may be the underlying cause of stress, ultimately creating conflict. • Position, Role and Domain Incongruency – Changes in specification of position or

poorly defined roles may cause conflict. • Incompatibility develops within channel arrangements as roles and methods of operation

change. • Conflict also arises when there is lack of agreement concerning appropriate domain of

members. • Communication Breakdown – Often is the reason for channel conflict. Could occur in 2

ways: • 1) When a firm fails to exchange vital information with other channel members. • 2) Through noise and distortion

• Different Perceptions of Reality – Conflict occurs when different channel members differ in methods of achieving mutual goals or have different solutions to a mutual problem.

• Even when they have a strong desire to cooperate, conflict can result from different perceptions of the facts.

• Ideological Differences – Are similar to those resulting from differences in perceived roles and expected behaviours. Can result from big-business and small-business perceptions of the appropriate role of management.

How to manage channel conflict?

Various methods of resolving channel conflict. Problem Solving. Persuasion Negotiation Politics Withdrawal

• Problem Solving: Two techniques Superordinate Goals : Essentially a goal that all channel members desire but that

cannot be achieved by anybody acting alone.. Development of a superordinate goal overrides individual member goals.

Communication Processes : Seeks to alleviate communication noise in distribution channels. More efficient communications in the channel will permit channel members to find solutions to their problems based on common objectives. Meetings and trade publications allow members to develop solutions to common problems and reinforce relationships.

• Persuasion – Emphasis is on influencing behaviour through persuasion rather than only sharing information. Specifically, it seeks to reduce conflict about domain.

• Negotiation – The objective is to halt a conflict, no attempt is made to fully satisfy a channel member. Could lead to a compromise, once basic reason for stress is arrested.

• Politics – Refers to the resolution of conflict by the involvement of new parties in the process of reaching an agreement. 3 solutions exist: Coalition formation : Refers to formation of trade bodies. This is an attempt to

alter channel power structure. Mediation & Arbitration : In mediation, the 3rd party may suggest a solution to

the conflict but the channel members are not bound to accept that solution, whereas in arbitration the solution suggested is binding upon the conflicting parties.

Lobbying & Judicial Appeal : Channel members may resort to the Govt. process to resolve conflicts. Attempts to influence the legislative process through lobbying activities are frequent. Court litigation is another means.

Withdrawal – If all other methods fail, then the last option for the termination of conflict is for one firm to withdraw from the relationship.

Channel Power - The ability to alter channel members behavior so that they take actions they would not have taken otherwise. For example, Wal-Mart has a lot more power, given its large volume purchases, than many of its suppliers

Coercive Power - Manufacturers threatens to withdraw or terminate if intermediaries fail to cooperate. A large retailer, for example, may tell a small manufacturer that no further orders will be forthcoming unless a price discount is offered.

Reward Power - Manufacturers offers an extra benefit for performing specific acts or functions. e.g., Coca Cola may be able to give a price break or pay a fee for additional shelf space. A retailer that meets a certain goal—e.g., the sale of 50,000 cases per month—may receive a bonus.

Legitimate Power - Manufacturers requests a behaviour that is warranted under the contract. e.g., auto dealers have a great deal of power over auto makers because only they are allowed to sell to end customers in the continental U.S. under most circumstances

Expert Power- Manufacturer has special knowledge that the intermediaries value. Wal-Mart, for example, because of its heavy investment in information technology, can persuasively argue about likely sales volumes at different price levels.

Referent Power - Manufacturer is so highly respected that intermediaries are proud to be associated with it.

Use of channel power

If one has at least any one above channel power in his hand. It can be utilized in the following manner:

One can easily control and manage channel according to his/her will. Like as mentioned above Walt-Mart has channel and expert power. So, its easy for wal-mart to drive channel accordingly

One having upper hand can motivate its channel member by rewarding like coca-cola does.

Channel power is also decided how much one channel members depends upon other All players are interdependent to each other. Power is the instrument of influence to make other member willing to act in situations. Channel power becomes more important if dependency of company is more on its

member but it remains till company finds any other alternative. One having power can drive accordingly under different situations.

Channel Control

One having channel control is one who has upper hand over other in some way other. That channel member should work best interest of the all the channel members. One doesn’t try to dominate other unnecessarily. Member having control should takes steps towards the fulfilling of the objective of the channel rather than driving channel in its own best interest.

Channel-Control Strategy

Horizontal Marketing System o Two or more unrelated companies putting together resources to exploit a

marketing opportunity. Example- HUL’s strategic tie up with PepsiCo for bottling and distribution of Lipton’s ready to drink beverages.

Vertical marketing Systems o It comprises the producer, wholesaler and retailer acting as a unified system o One channel member (channel captain) owns the other and has so much of power

that they all cooperate o It arose because of strong channel members attempt to control channel behavior &

eliminate the conflict when members pursue their own objectives.

Multi-channel Marketing Systems (McMS) o It occurs when a single firm uses two or more marketing channels to reach one or

more customer segments.

Channel Relationship maintenance strategies. HIGH LOW

Integration by Negotiation Compromise by sacrifice LONG RUN

Forcing by Domination Withdrawal by avoidance TRANSACTIONAL

The above model describes if one has to keep long run relationship with its channel members that one always has to be flexible and ready for negotiations on terms and conditions from time to time and there should be less scarifies by other in terms of revnue sharing etc.

On the other hand, if one member is highly dominating don’t ready to negotiate than there would only short term and only transactional relationship.

Bargaining Theory Of Distribution Channel

A critical factor in channel relationships between manufacturers and retailers is the relative bargaining power of both parties. Bargaining between manufacturers and retailers over the terms of trade is an important characteristic of many distribution channels. Relationships between manufacturers and their retailers often hinge on the importance of negotiation and its effects on each party’s share of the pie, as well as on channel coordination. This role of bargaining and the exercise of bargaining power by participants exist in distribution systems in a wide range of industries. The following examples illustrate the common problems that are associated with bargaining in channels:

Example 1: Grocery Channel Vendors in the grocery industry frequently complain that powerful retailers are creative in finding unpredictable methods to extract additional revenues.

Example 2: Construction Supplies Channel In the $660 billion construction supplies channel, relationships depend on the negotiation power of the parties. With little placed in writing, there is often disagreement over what has been negotiated.

Example 3: Automobile Channel In recent years, there have been several reported cases of General Motors (GM) acting coercively against its upstream suppliers in squeezing procurement costs. The purchasing head of GM often disregarded contracts that had been signed with suppliers, demanding that they be renegotiated at more beneficial terms to GM.

These examples highlight some critical issues in distribution channel management. First, the channel relationship involves the manufacturer and the retailer indulging in a bargaining process.

Second, a problem faced in channel relationships is that manufacturers and/or retailers can renegotiate their earlier agreements. This renegotiation occurs because of the nonspecifiability of the product exchange. Third, considering product non specifiability and bargaining helps us address a persistent inconsistency between the theoretical literature on distribution contracting and observed managerial practice. Factors leading to Bargaining • Non – Specificability of Contract • Demand Uncertainty, • Un-observability of retail price

Non–Specificability in Contract

Non-Specificabiltiy of contract means certain terms and conditions not mentioned in the contract or for they have agreed upon verbally.

In such situations there might n numbers of conflicts can arise, like

In case of loss or damage of goods, who will pay or in what share channel members will have to bear that loss

Who will bear warehouse expenses and damaged occurred in warehouse Who will held responsible, if technology go obsolete like in case of laptops, software’s

etc. In case of bad debts, who will bear that loss.

Demand Uncertainty

It is always very difficult to predict market demand. Channel members have to keep check on market demand and have to create demand. It’s one of the major function of Channel member.

Un-observability of Reatil Price

Manufacturer must keep check on that retailer is not charging unnecessary high price from the consumer. Charging high price can affect its goodwill and will decrease its market , in case there a substitute product with less price is available in market.