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Channel Conflict

Based on a study of Papers and Experience


Group 16 Names Praveen Khanna (WMP6100) Abhay Gupta (WMP6132) Submitted to: Prof. Rajiv Kumra

Table of Contents
1 2 Executive Summary..................................................................................................... 3 Channel Conflict .......................................................................................................... 3 2.1 Types of Channel Conflict ................................................................................... 4 2.2 Causes of Channel Conflict .................................................................................. 4 2.3 Behavioral Aspects of Channel Conflicts ............................................................ 5 2.4 Detecting Channel Conflict .................................................................................. 6 2.5 Strategies for Managing Channel Conflict ........................................................... 6 2.6 Mitigating Channel Conflict ................................................................................ 9 Real life examples of Channel conflict across various Industries ............................. 10 3.1 Vertical Conflict ................................................................................................. 10 3.2 Horizontal Conflict............................................................................................. 11 3.3 Multi-Channel Conflict ...................................................................................... 11 Strategies of Resolving Channel Conflicts ................................................................ 12 Conclusion ................................................................................................................. 13 References ................................................................................................................. 14

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1 Executive Summary
The aim of this paper is to study channel conflict, its types, various causes and strategies of countering the same. The paper refers to different sources (World Wide Web, internal sources) to study aspects of channel conflicts and ways of countering channel conflict. The paper finally looks at some example of Channel Conflict, what issues arose and how the management was able to/not able to reslove the issues of channel conflict.

2 Channel Conflict
A marketing channel system is the particular set of interdependent organizations involved in the process of making a product or service available for use or consumption. Channels can be classified as zero level (direct marketing channels), one level channel containing one intermediary such as retailer, two or three level containing wholesaler, jobbers, and retailers. Conflict is opposition, disagreement or discards among the organizations. A channel conflict may be defined as A situation in which one channel member perceiv es another channel member(s) to be engaged in behavior that prevents it from achieving its goals. Channel conflict occurs when one members actions prevent another channel from achieving its goal .

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2.1 Types of Channel Conflict


Three types of channel conflicts exist in practice: 1. Vertical Conflict: Involves firms at different levels within the channel (e.g., airline vs. travel agent, manufacturer vs. wholesaler, wholesaler vs. retailer). 2. Horizontal Conflict: Involves firms of the same type and at the same level in the channel (e.g., supermarket vs. supermarket or retailer vs. retailer) 3. Multichannel Conflict: Multichannel conflict exists when manufacturer has established two or more channels that sell to the same market. This involves firms at the same level of the channel, but of different types (e.g., supermarket vs. drug store).

2.2 Causes of Channel Conflict


Some of the causes attributed to channel conflict include:
Conflict Type Horizontal Conflict Cause Intensity of competition among retailers Unclear roles and rights Differences in perception Intermediaries dependence on manufacturer Goal incompatibility Differences in perception Goal incompatibility Unclear roles and rights

Vertical Conflict

Multi-channel

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2.3 Behavioral Aspects of Channel Conflicts


Let us look at some behavioral aspects of channel conflict from the paper Managing International Distribution Channel Partners: A Cross-Cultural Approach. This is of particular concern because cross-national channel partnerships are on the rise, and divergent cultures may engender heightened conflict, which has a deleterious effect on channel performance. Different cultural perspectives influence distributor attitudes and behavior, which may cause intense disagreementsmanifest conflictbeyond those found within domestic distribution channels The impact of culture and leadership style on channel partner performance is depicted below:

Channel leadership can be conceptualized as the activities performed by the channel leader to influence the marketing policies and strategies of channel partners. For more than a generation, distribution channels scholars were preoccupied with studying leadership by focusing primarily on the control, power, and power basesthe power-influence theory of leadership. Culture is learned and shared among a group of people. People from a given culture exhibit similar norms and values and, therefore, culture affects the values found in the workplace (e.g., Hofstede, 1991).

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1. Participative leadership styles demonstrated by the channel leader will exhibit an inverse association with manifest conflict, as perceived by channel partners. 2. Supportive leadership styles demonstrated by the channel leader will exhibit an inverse association with manifest conflict, as perceived by channel partners. 3. Directive leadership styles demonstrated by the channel leader will exhibit an inverse association with manifest conflict, as perceived by channel partners. 4. In collectivistic, weak uncertainty avoidance, small power distance and feminine oriented societies, participative and supportive leadership styles would be more effective in reducing manifest conflict than a directive leadership style. 5. In individualistic, strong uncertainty avoidance, large power distant, and masculine oriented societies, directive leadership style would be more effective in reducing manifest conflict than participative and supportive leadership styles. Irrespective of a societys degree of individualism, uncertainty avoidance, power distance, and masculine feminine orientation, manifest conflict will exhibit an inverse association with channel partner performance.

2.4 Detecting Channel Conflict


Conflict is usually spotted after it is well developed and obvious. So it is desired by a Channel Manager to have some kind of Early Warning System. Foster and Shuptrine suggest that a Channel member can help spot potential conflict areas by surveying other channel members perception of his or her performance. The research on which their suggestion is based measured retailers perception of Wholesaler and distributors. Such type of regular surveys helps in spotting any type of channel conflict at pretty early stage. Marketing Channel Audit offers another possible approach for uncovering potential conflict between channel members. The term channel audit suggests a periodic and regular evaluation of key areas of the relationship of a given channel member with other members. The process of appraising various areas of the relationship, potential conflicts are more likely to be detected. Distributors advisory councils or Channel member committees offer another approach to early detection of channel conflict. These groups consist of top management representative of the manufacturer and key executives from a select group of distributors. Such groups meet on a regular basis to discuss a wide range of channel issues and strategies.

2.5 Strategies for Managing Channel Conflict


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. Some approaches that can be employed to contain channel conflict include: 1. Adoption of super ordinate goals Study on Channel Conflict Page 6

2. Exchange of employees between channels (intra and inter to develop trust and shared objectives). 3. Joint membership in trade associations. 4. Cooptation: Provide MDF/Co-op and let the partners choose to establish their own competitive advantage. 5. Diplomacy: Occurs when each side sends a person or group to meet with its counterpart to resolve conflict. 6. Mediation: This implies resorting to neutral third party skilled in conciliating between two parties interests. 7. Arbitration: Occurs when the two parties agree to present their arguments to one or more arbiters and accept arbitration decision. 8. Legal recourse 9. Power: Different types of powers exist with the manufacturer Reward: Offer something of positive value to get other party to do what you want. Punishment (coercion): Inflict a negative sanction (e.g., take away franchise, charge higher delivery cost for late orders) Referent: Channel member does what other channel member wants because the former member wants to identify as being part of the channel in which the latter member is a member Expert: Channel member does what other channel members wants because the former member wants the benefit of the knowledge of the other channel member (e.g., franchisee vs. franchisor) Legitimate: Channel members have a contract (e.g., franchise) which stipulates what has to be done. If a party to the contract does not carry out what contract says, other channel member may have to use punishment (coersion) to get the other party to act (e.g., to member to court). 10. Segment the products (different products are sold through different partner types or channels) 11. Setup exclusive or limited territories 12. Setup different promotions for different partners--rotating so they all have advantages at different times Specifically in case of horizontal channel conflict, 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 deceases. 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. Consider the following cases:

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(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 select 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 (i.e. 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", i.e. 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 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 demotivated 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 (i.e. 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. Study on Channel Conflict Page 8

2.6 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.

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3 Real life examples of Channel conflict across various Industries


3.1 Vertical Conflict
TATA SKY- DTH products were always sold through specialty retailers in past but Tata Sky decided to have its own sales force approach directly on customer base, This strategy caused massive annoyance among their retailers. During 2006 Company intended to bypass intermediaries (retailers and distributors) and initiated the concept of selling directly to consumers by Tele-calling, Demo activities and other direct Sales promotion activities which in turn created chaos and conflict within the trade. Most of the Retailers associations started uprising against this concept and barred selling Tata Sky from their outlets. Retailers even stopped selling recharge coupons of Tata sky to the existing customers. This gradually became a major concern for the company, so eventually company not only withdrawn this concept but also had to put extra efforts( get together, Incentive schemes etc) to re-establish themselves in the trade. Philips lighting- Within traditional channel Philips lighting has to countenance vertical conflict on an ongoing basis. They have two types of traditional distribution channel Company>>>>> C&F>>>>> Distributor>>>>> Retailers>>>>>Customers Company>>>>> C&F>>>>>Distributor>>>>>Wholesaler>>>>> Customers

Here the wholesaler is the major cause of conflict; Wholesalers do bulk buying, give immediate payment but needs a higher margin whereas retailers doesnt buy volume and even doesnt prefer to pay before 30-45 days, Further to that wholesaler defy professional and legal practices like tax evasion, Piracy etc, which helps them in selling much products at cheaper rate than the retailers who are buying at higher cost and generally do business with ethics. Immediate and ideal solution of this conflict which company has , is not to permit wholesale dealing by distributors but the temptation of easy selling and pressure of Sales target achievement is such, that Sales representative themselves dont want to avoid this channel.

Another example of Vertical conflict can be conflict between Modern retails companies and other manufacturers (Brand Owners), Most of the Modern retailer have their own private label brands, for eg : Big Bazaar has Koryo, D&J; Croma has croma; which carry competing lines and give more showroom space. Retailers promote and sell more private labels than promoting the manufacturers brands. Retailers encourage customers to switch to private a label which carries attractive discounts. Companies still cant do much in restricting this practice.

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3.2 Horizontal Conflict


Horizontal conflict is the most common conflict and can be seen everywhere, and in almost all sort of industries. Common examples areRetailers offer extra discount and services to attract customer of other retailers. This conflict can be seen when the rivalry and number of sellers are higher, the similar type of Conflict started when Tata started their Croma stores to cater and downsize their launch buzz, Electronics Bazaar (A unit of Future Bazaar) came up with heavy advertisement and attractive offers. Another example of Horizontal conflict is infiltrating by one distributor to other distributors area, generally distributor try to sell material in the areas of other distributor, A familiar example is Vodafone, which has divided Noida into 6 territories and 6 different distributors are handling their individual areas, but the practice of infiltrating is always there causing conflicts within distributors.

3.3 Multi-Channel Conflict


Prior to Modern retail in India, Scope of Multi-Channel Conflict in India was very limited but now after emergence of Modern retail and rise of e-Commerce, sales managers now have to deal with Multi-Channel conflict too. At Samsung company had to deal with conflict at a very vast scale, Prices at which Samsung used to bill products to their distributors, Big Bazzar had started selling products of Samsung at that cost to the customers, Every now and then Big bazzar used to come with some scheme which used to disturb regular trade a lot; Eventually it created huge confusion and disorder, Sales people had to face huge resistance from distributor, many of the old distributors had to stop working with Samsung. So Samsung had to come up with entirely different range of products and departments, Company created separate department for Modern retail business and developed separate products for both the trades, so now both the channels cant compare the prices as the models are different. This step helped company in resolving this issue at a very large extent.

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4 Strategies of Resolving Channel Conflicts


Conflict is a natural phenomenon, which cannot be eliminated. In channel management, it is an inevitable as many individuals, institutions are involved and they are interdependent. Certain conflicts are constructive too. The conflicts can be reduced and managed better to reduce the friction in the channel management. Various techniques can be used to resolve the conflicts. It is important to find out the root cause behind the conflict so that appropriate technique can be used to resolve the conflicts and lasting effect is possible.

Some techniques are as follows Channel leadership Many channel conflicts can be resolved through the effective channel leadership. Channel leader is able to reduce conflicts because he possesses the channel power. Channel power is the ability of one channel member to influence another members marketing decisions and goal achievement. It enables the leader to influence overall channel performance. The channel leader controls resources on which other members depend. Channel power can increase conflict and reduce cooperation if one channel member uses coercion to influence others. Manufacturers, wholesalers or even retailers can become the channel leaders. For example, producers like IBM, Ford can act as channel leaders because of their economic power. Adoption of Super ordinate goals The channel members come to an agreement on the fundamental goal they are jointly seeking, whether it is survival, market share, high quality or customer satisfaction. Exchange of persons between two or more channel levels This helps in better understanding. It can reduce the misunderstanding and conflicts can be reduced substantially through this communication. Each will grow to appreciate the others point of view and carry more understanding when returning to their position. Co-Opt It is an effort by one organization to win the support of the leaders of another organization by including them in advisory councils, board of directors so that they feel that their opinions are being heard. Co-optetion can reduce conflict provided both the parties compromise some or the other issues in order to win the support of the other side. Joint membership in and between trade associations Such associations bring all participants under one roof for more exposure to the public and to improve relations with each other by understanding their problems. Diplomacy Diplomacy takes pace when each side sends a person or a group to meet with their counterpart from the other side to resolve the conflict. It makes sense to assign diplomats to work more or less continuously with each other to avoid the conflicts. Third-Party Mechanisms When conflict is chronic, and the above mentioned techniques are ineffective, both the parties may have to resort to third parties, which are not involved or not the part of the existing channel. Arbitration In this method, the two parties agree to present their arguments to a third party and accept arbitration decisions.

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Mediation Mediation implies resorting to a neutral third party who brings skills in conciliating the interests of the two parties. Mediation is the process whereby a third party attempts to secure settlement of a dispute by persuading the parties either to continue their negotiations or to consider procedural recommendations that mediator may make. Mediator has a fresh view of the situation and may perceive opportunities that insiders cannot. Effective mediation succeeds in clarifying facts and issues. Mediators help the parties to set up their own decisions whereas in arbitration it can be compulsory.

5 Conclusion
Channel conflict is inevitable. According to Forrester Research and Gartner, 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. Channel Managers need to make conscious effort to detect conflict or its potential if they expect to deal with it before it develops. 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. We also looked at behavioral approached (individualistic vs. collectivist culture) on channel conflict. Companies need to be smart, efficient and effective and use multiple strategies as stated in section two to detect, analyze, mitigate, contain and resolve channel conflicts.

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6 References
http://faculty.msb.edu/homak/homahelpsite/webhelp/Distribution_-_Channel_Conflict.htm http://calabash.ca/marketingproblemsonline/conflictpower-note.pdf http://en.wikipedia.org/wiki/Channel_conflict Chapter 15 Designing and Managing Integrated Marketing Channels Marketing Management th by Philip Kotler 13 Edition Case 6 Hassler and Howard Inc & Case 7 Barnes and Noble College Book Stores - Marketing th Channels 7 Edition Bert Rosenbloom Managing Channel Conflict, Seung, Woo, LIMRA's MarketFacts Quarterly; 2010; 29, 3; ABI/INFORM Complete THE PECULIARITIES OF CONFLICTS MANAGEMENT IN MARKETING CHANNELS Rasa Gudonaviien, Sonata Alijoien, Laurynas Aukionis CHANNEL CONFLICT GNAWS AT RETAILERS, O'Heir, Jeff, Dealerscope; Sep 2010; 52, 9; ABI/INFORM Complete Managing International Distribution Channel Partners: A Cross-Cultural Approach, RAJIV MEHTA School of Management, New Jersey Institute of Technology, Newark, New Jersey, USA, ROLPH E. ANDERSON LeBow College of Business, Drexel University, Philadelphia, Pennsylvania, USAb ALAN J. DUBINSKY Sogang Business School, Sogang University, Seoul, Korea, and Center for Sales Innovation, St. Catherine University, St. Paul, Minnesota, USA PIA POLSA Hanken School of Economics and Business Administration, Helsinki, Finland, and School of Management, Fudan University, Shanghai, China JOLANTA MAZUR Warsaw School of Economics, Warsaw, Poland

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