when is conflict dangerous
TRANSCRIPT
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MARKETING
AtTIIlN Pl.LS
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Channel
conflict:
W hen is it
dangerous?
ANUFACTURERS TODAY sell
their products through a
dizzying array of channels
from Wal-Mart to the World Wide
Web and everywhere in between. Since
most manufacturers sell through several
chan nels simultaneously chan nels
sometimes find themselves co mp eting
to reach the same set of customers.
When this happens channel conflict
is virtually g uar an teed . Such conflict
almost invariably finds its way back to
the manufacturer.
Conflict comes in many forms. Some
is innocuous - merely the necessary
friction of a com petitive busine ss
environment. Some is actually positive
for the ma nufa cturer forcing o ut-of-da te
or uneconomic players to adapt or
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CHANNEL CONFLICT: WHEN
IS IT
DANGEROUS?
perish.Butsomeistruly dang erous, capableofunderminingtheeconomic
of eventhebest prod uct .
Dangerous conflict generally occurs when one channel targets customer seg
ments already served by anexisting channel. This leads tosuchadeter io
ration ofchann el econom ics that thethrea tene d chann el ei ther retal iate
against
the
m anufacturer
or
simply stops selling its pro duct.
In
either case,
th
manufacturer suffers.
The stakescan behigh. Cons idera few e.xamples from the United States
Hill's Science Diet
pet
food lost
a
great deal of supp ort
in pet
shops
and
feed
storesas aresultof the company's experiments witha store withinastore
pet shop conceptinthe competing grocery channel.Inthe auto market, ATK
the dom inan t seller
of
replacement engines
for
Japanes e cars, lost
its
virtua
monopoly when
it
a t t e m p t e d
to
unde r c u
. , r u
distributors and sell direct to individua
Manv manutacturers nave , .
u J.- 12 , mechanics and mstallers.
a hard time nguring out
exactly which conflicts ^ , ^ . < A
^.^
., . Q ua ke r O ats recent SI.4 b ih o n writeoff from
will posea t h r e a t , , ^
o . ,
the divest i ture
of its
Snapple business
wa
caused in par t bychanne l conflict . Q uak e
had planned
to
conso lidate
its
highly efficient gro cery cha nn el su pp ortin
the G atora de brand with Snapple's channelsforreaching convenience stores
Snapple distributors were supposed to focuson delivering small quantitie
of both brands
to
convenience store accounts while Gato rade 's warehous
delivery channel h andled larger orderstogrocery ch ainsandmajor accounts
leveraging Qua ker's established strength
in
this area.
However,
the
strategy backfired. As Q uak er suggested moving larger Snap pl
accountstoGatorade's delivery system, Snapple's distributors revolted. The
saw
the
value
of
their Snapple business
as an
exclusive geo grap hic franchis
that
the
split channe l strategy would u nd erm ine. Several Snap ple distributor
took legal action against Quaker. The company ultimately backed down,bu
the dispute had created
a
considerable distraction
at a
time when co mp etition
from Arizona
and
N antu cke t N ec tar s was intensifying.
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CHANNEL CONFLICT: WHEN IS IT DANGEROUS?
reaches a ma rket that was previously unserved . W hen C oca-C ola installed its
first vending m achines in Jap an, for instance, retailers objected. H owever, the
company succeeded in showing that while the vending machines did indeed
serve the sam e cus tom ers, they did so on difterent occasion s and offered dif-
ferent value propos itions. It was able to coun ter the retaile rs' noisy co m plaints
with econom ic realities. In a similar way, com panies like Cha rles S chwab are
using online channels to satisfy latent consum er dem and for new appro ache s to
personal financial services, such as low prices com bined with abundan t, readily
accessible inform ation for the do-it-yourself cu stom er segm ent.
Sec on d, do channels m istakenly believe they are com peting when in fact
they are benefiting from ea ch other s actions? New channels sometimes
appear to be in conflict with existing ones when in reality they are expanding
product usage or building brand support. Nike, for instance, has forward-
integrated into NikeTown flagship stores that have enhanced brand aware-
ness and prestige and given the company more control over brand image.
Tho ugh com peting athletics stores balked at first, the new store is though t to
have boosted sales across all channels.
The collaboration of publishers with new Interne t bookseller Amazon.com to
enable books to be sold on line and reduce return rates has forced category
killers like Borders and Barnes & Noble to enter the online arena. Although
it is still too early to tell, this strategy may expand the market for books as
consumers enjoy easier access to the product and use tools such as EYES,
Amazon's browser, to obtain additional information on new titles.
In insurance. Progressive Auto Insurance has successfully introduced direct
telephone sales alongside its agency channel. Auto-Pro provides a 24-hour
referral service to agents as part of the service. Avon appears to be following
a similar strategy in cosmetics: i ts soon to be launched Internet site will
perm it bo th d irect transactions and referrals to Avon sales representatives. We
believe that efforts like these will actually enhance sales in other channels,
not cannibalize them.
Th ird, is the deteriorating profitability of a griping player genu inely the
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CHA NNE L CONFLICT: WHEN IS IT DANGEROUS?
on unsuitable partners, manufacturers should monitor the operations of
channel partners and work to develop their skills and capabilities. They may
also find it helpful to switch partners from time to time.
Fourth,will channel s decline necessarilyh rma manufacturer s profits?
Channels sometimes deteriorate because of economic shifts and changes in
consumer preferences. case in point is the decline of uneconomic m edium-
sized cigarette distributors and jobbers in the United States during the 1970s
and 1980s. These companies were relics of an era ofhighly fragmented sales
and distribution. Cigarette brand leaders refused to prop them up, putting
their might behind larger, more economic players instead .
More recently, large pharmaceutical companies and their distributors have
refused to reduce their profit margins to support independent pharmacists.
Instead, they have chosen to favor HMOs and mail-order pharmacies with
cheaper prices for bulk orders so as to develop relationships with these new
and increasingly important channels. Independent drugstores demanding
equal treatment launchedafederal court antitrust suit thatisyet to be resolved
If a channel is declining because of the emergence of
a
competing channel
that consumers prefer, the manufacturer s strategic priority must be to align
with the new channel. The trick is to do so without provoking the wrath of the
declining channel, especially if it continues to carry significant volume. In
the United States, specialty pet food producers are actively aligning with
two emerging category killers, PETsMART and Petco, while simultaneously
supporting the economics of small pet shops. These latter players are clearly
in decline, but still represent 60 percent of specialty pet food volume.
Similarly, when Goodyear entered mass merchant channels, it kept inde-
pendent dealers happy by introducing specially designed programs to drive
share growth in the tire replacement market.
Decision-making frame work
Importanceof threatened channelintermsof
current
o r
poten tial volume
or
p rofitabil i ty
iHigh
Low
ien
to ct
Answering these four ques-
tions gives manufacturers a
better understanding of which
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CHAN NEL CONFLICT: WHEN IS IT DANGEROUS?
cost of preserving the volume and related profits of the existing channel with
the economic benefi t of entering a new channel , taking into account the
likelihood of retaliation and the costs it might involve.
Scen ario planning or gam e theory can be used to predict channel responses
and to estimate the cost of taking no action. However, as a general rule, a
channe l in distress that is not in decline and c arries m ore than 1 to15percent
of volume and/or profit needs attention.
verting chan nel disaster
If a man ufacture r determ ines tha t channel conflict is potentially d angerou s,
the next qu estion is exactly what to do abo ut it. Exhibit 2 outline s a variety of
ways to tackle channel conflict at different stages in i ts development. If
conflict has recently arisen betw een channe ls focused on the same segm ents,
a supplier might respond by introducing separate products or brands tailored
to each channel.
Ten ways to manage channel conflict
Exhibit
Two Of more
channels target
th e
same customer
segments
1.
D i f fe rent ia te channel
o f fer
2.
De fine exclusive
terr i tor ies
3. Enhance or change
the ch annel s value
prop osi t ion (eg, by
bu ilding skil ls in
value chain)
hannel economics
deteriorate
4 .
Cha rge the channel s economic formu la:
Grant rebates i f an intermediary fulf i l ls
certain program requirements
Adjust margins between products to support
di f feren t channel economics
Treat channels fairly to create level playing
f ie ld
5. Create segment-specif ic program s (eg, certain
services not available via direct channels)
6. Com plement value proposi t ion of the exist ing
channel by introducing a nevy channel
7. Foster consolidation among intermediaries in
a decl in ing channel
Threatened channel
stops performing or
retal iates against
the suppl ier
8. Leverage povi/er
(eg,a s trong brand)
against the channel
to prevent retal iat ion
9, Migra te volume to
winning channel (eg,
to w arehouse c lubs
for packaged goods)
10, Back off
Black Decker, for instan ce, offers thre e different ranges via thre e different
cha nne ls. For casual do-it-yourselfers, it m arkets the Black De cker range
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CHAN NEL CO NFLICT: WHEN IS IT DANGERO US?
offerings at the high end of street prices to avoid channe l conflict, and add s value
by providing guidance for prospective buyers. Its Web site includes over15 pages
of information targeted at novice, interm ediate , and adva nced wine lovers.
Another company using a differentiated brand strategy to serve multiple
segments simultaneously is Levi Strauss. It targets Britannia jeans and Levi
branded casual wear to moderate-income families via discount chains such
as Wal-Mart and Target, while aiming Dockers and Silver Tab clothing at
fashion-conscious young adults who shop in department stores and specialty
retailers. Young professionals in search of busines s casual wear are catered for
by Slates, on sale in M acy s, Bloomingdale s, and othe r u pm arket de par tm ent
stores, while at the opposite end of the scale, bargain hunters can find over-
stocks and seasonal, discontinued , or dam aged m erchand ise from all ranges
by shop ping in Levi s own outlets.
Alternatively, a manufacturer can create the il lusion of differentiation by
using difterent nam es and num bers for the same items and introdu cing minor
product modifications. In the mattress industry, for example, major suppliers
ofter similar or identical produ cts through difterent chan nels un der different
nam es. Cu stom ers are confused by what ap pea r to be hund reds of different
mo dels - so much so, in fact, that savvy retailers compile lists of co m para ble
products as sales tools.
Similarly, consum er electronics com pan ies som etimes a llocate different mo del
num bers to the same prod uct in different channels. However, this appro ach
may now be losing ground. Rather than relying on model numbers, consumers
are increasingly using buying guides (many of them available on the Internet)
to mak e objective co mp arisons of features and prices.
Another approach manufacturers might adopt is to divide channel roles so
that individual channels are contined to performing specitic functions in the
value delivery chain. That could mean allocating exclusive territories, or
simply improving the definition and e nforcem ent of roles and term s within a
channel, as copier man ufacturers such as K odak did to settle the war between
value-added suppliers and brokers.
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CHANN EL CONFLICT: WHEN IS IT DANGEROUS?
hand, it offered its dealers similar purchase d iscounts to those received by
large retailers, coupled with financial advice and inventory system support.
On the other, it provided capital in the form of favorable loan programs to
help dealers finance the remodeling of their stores. As a result, the GE
division expanded its market share from 27 percent in 1992 to 30 percent in
1996,
despite intense com petition. In a similar vein, Sears offers appliance
dealers in rural areas financing, systems support, and help in managing
accounting and inventory
If overlap and falling channel profits are unavoidable, manufacturers must
assess whether they can withstand the retaliation of their channel. Often,
though, a channel will be reluctant to retaliate because retaliation would hurt
it more than the conflict does. This is usually the case when it is the m anu-
facturer rather than the channel that really owns the customer. Leading
consumer goods companies may also be able to leverage their powerful
brands against a channel to prevent retaliation, as Procter Gam ble did
when the new club channel emerged and took volume from grocery stores.
Alternatively, a supplier can accept that a channel will react, but limit the
consequencesbyaccelerating the migration of volume toacompeting channel.
Airlines have pursued this approach by encouraging a shift in sales volume
from costly agency networks to direct channels and ticketless travel options.
In a few contentious cases, manufacturers have had no choice but to back
down. IBM's PC group took this path when its attempts to sell direct were
met with vehement objections from its distributor network. The problem of
how to go direct remains unresolved, but the hemorrhaging of IBM's sales
and market share has been slowed.
When Bass Ale piloted a home delivery service in the United Kingdom in
November1995,cash-and-carry warehouses and convenience stores protest-
ed, fearing they would lose business. Nurdin Peacock, a leading cash-and-
carry operator selling to independent retailers, withdrew ten Bass beers from
its shelves and encouraged its customers to avoid Bass products. Bass
abandoned the pilot.
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