Channel Management

MKT508: Sales & Distribution Management

Chapter 14
 Learning Objectives
• Understand the use of power bases
• Understand how and why channel conflicts occur
• Look at ways of managing conflict
• Channel practices followed to resolve conflicts
• Principles of channel management
• Various parameters on channel policy
• Way in which services use marketing channels
• Some unique distribution examples
 Channel Management

• Is in three broad phases:

– Use of power bases
– Identifying and resolving channel conflicts
– Channel co-ordination

Use of power….
 Use of Power Bases
• Channel system has a set of players:
– Not equally motivated to implement the ideal channel
design
– Whose expectations from the system differ

• Use of the 5 power bases brings diverse channel partners in

line for effective implementation
– 5 power bases are: reward, coercion, legitimate, expert and
referent (French & Raven)
– Two more power bases in the Indian context are support
and competition
 Use of Channel Power
• Channel members are dependent on each other. The power
equations between them keep them working together.
• There are basically 5 types of power bases – reward,
coercion, expert, reference and legitimacy. 2 more can be
considered as support and competition.
• Extent of dependence defines the power base which is
appropriate.
 French & Raven

“Power” of Motivation
• Reward – incentives for good performance
• Coercion – threat of punishment for non-performance
• Referent – benefit of sheer association with a strong company
• Legitimate – arising out of a contract
• Expert – specialized knowledge
• Support – additional benefits for better performers only
• Competition – created between channel partners

Countervailing power……
 Countervailing Power
• Balances the power exerted by one channel member. It is not a one-
sided equation.
• Both the channel member and the principal can have influence on
each other.
• Results from interdependence within the channel system.

– Company exerts power on the distributor to get its coverage and

revenues
Examples

– Distributor has enough influence on his customers and this is

critical for the company also
– Weaker partners do get exploited – ancillary units
Co-ordination…
 Channel Co-ordination
• Channel system is well co-ordinated if each member
understands his role correctly and performs it to help the
system achieve its customer service objectives.
• In a co-ordinated channel:
– Interests of all channel members are protected
– Actions of all are in line with overall objectives
– Flows are streamlined to achieve desired customer service
objectives
• Channel co-ordination is an on-going effort

Conflict….
 Channel Conflicts

• Conflict is generated when actions of any channel member

come in the way of the system achieving its objectives
• Three broad categories of channel conflict are:
– Goal conflict – understanding of objectives by various
channel members is different
– Domain conflict – understand responsibilities and
authority differently
– Perception conflict – reading of the market place is
different and proposed actions vary
 Channel Conflict

CONFLICT

GOAL DOMAIN PERCEPTION

 Channel Conflict

• Situation of discord or disagreement between partners in

the same channel system – has negative connotations
and is driven more by feelings than facts
• Conflict is part of any social system – getting disparate
entities to work together as in a channel system is also
one such social unit
• If any member feels that another is working in a manner
as to affect him, conflict results
 Conflicts Result From…

• Each channel member wanting to pursue his own goals

• Each wants to retain his independence
• There are limited resources which all of them want to utilise
in achieving their goals
• Features of conflicts:
– Initially latent and does not affect the working
– Is not normally possible to detect till it becomes disruptive

Four stages….
 Four Stages

LATENT

PERCEIVED

FELT

MANIFEST

Each stage is progressively more severe than the earlier one

 Types of Conflicts
• Latent Conflict:
– Some amount of discord exists but does not affect the
working or delivery of customer service objectives.
– Disagreement could be on roles, expectations,
perceptions, communication.

• Perceived Conflict:
– Discords become noticeable – channel partners are aware
of the opposition.
– Channel members take the situation in their stride and go
about their normal business
– No cause for worry but the opposition has to be recognized
 Types of Conflicts
• Felt Conflict:
– Reaching the stage of worry, concern and alarm. Also known
as ‘affective’ conflict.
– Parties are trying to outsmart each other.
– Causes could be economical or personal
– Needs to be managed effectively and not allowed to escalate.

• Manifest Conflict:
– Reflects open antagonistic behaviour of channel partners.
Confrontation results.
– Initiatives taken are openly opposed affecting the
performance of the channel system.
– May require outside intervention to resolve
 Channel Conflict Types

Type of conflict Briefly explained

Producers and channel partners selling to the

Hybrid channels same customers

Between channel partners at the same level.

Horizontal Distributors straying into each other’s territory.

Between channel partners at two different levels.

Vertical A C&FA despatches goods not ordered by the
distributor in order to make up a truck load.
 Reasons / Sources of
Channel Conflict

• Roles not defined properly

• Allocation of scarce resources between members seems
unfair to some
• Differences in perception of the business environment
 Reasons / Sources of
Channel Conflict

• Future expectations not likely to materialize

• Decision domain disagreements – who has to decide on what
(key account pricing)
• Channel members do not agree on objectives
• Misunderstanding or mis-interpretation of routine business
communication
 Channel Conflicts – Hybrid
Channels
• Higher credit period for key accounts than company
permitted to distributors
• More favourable delivery terms to key accounts affecting
distribution costs of channel partner
• Direct sales prices lower than for the rest of the customers
• Company sales people complete sales – distributor used
only for delivery

Resolving….
 Resolving Conflicts

A 4 Stage Process

Understanding nature and intensity

Tracing the source of the conflict

Understand the impact of the conflict

Strategy and plan of action for resolution

Conflict Resolution Styles

Avoidance Styles are a combination

of assertiveness and
Aggression co-operation.

Accommodation

Compromise

Collaboration

Least effort and Maximum effort and

results Best results

Kenneth W Thomas
 Avoidance

• Used by weak channel members.

• Problem is postponed or discussion avoided.
• Relationships are not of much importance.
• As there is no serious effort on getting anything done,
conflict is avoided.
 Aggression

• Also known as a competitive or selfish style.

• It means being concerned about one’s own goals without
any thought for the others.
• The dominating channel partner (may be the principal)
dictates terms to the others. Long term could be
detrimental to the system.
 Accommodation

• A situation of complete surrender.

• One party helps the other achieve its goals without being
worried about its own goals.
• Emphasis is on full co-operation and flexibility in
approach. May generate matching feelings in the receiver.
• If not handled properly, can result in exploitation
 Compromise

• Obviously both sides have to give up something to meet

mid way.
• Can only work with small and not so serious conflicts.
• Used often in the earlier two stages.
 Collaboration

• Also known as a problem solving approach

• Tries to maximize the benefit to both parties while solving
the dispute.
• Most ideal style of conflict resolution – a win-win approach
• Requires a lot of time and effort to succeed.
• Sensitive information may have to be shared
 Channel Policies

• Defines how the channel is required to operate.

• Normally framed by the channel principal to guide the
operations of the channel system
• If not framed properly could prove the starting point of
channel conflicts.
• Some subjects of channel policies could be as seen in the
next slide:
 Channel Policies

• Markets to be covered
• Customer coverage
• Pricing
• Product portfolio to be handled
• Selection, termination of channel members
• Ownership of the channel
 Managing International
Distribution Channels – Clara Lu
• After prior research, choosing the right markets for the
company products
• Local logistical concerns to be understood – local retailers
or on-line, physical reach
• Shipping goods direct to customers – freight, insurance,
goods lost in transit
• Distribution to international retailers – delivery, payments,
communication
• Managing international currencies, risk of value
fluctuations
 Developing a Channel
Strategy – Ian Linton
• Choosing the right channels
• Reach – providing existing coverage. Is internet a choice?
• Cost comparison on direct and indirect
• Access to additional customer base at no additional cost –
distributors and dealers
• Marketing support programs for channels
• Direct company sales people for key accounts
 Channel Optimization – Mark
Harvey
• Identify the most profitable customer segments
• Select the strongest channel partners to serve these
segments
• Most optimum mix of marketing programs to use the
limited resources to be developed
• Fully exploit the internal channels of own sales force, key
accounts team and the internet
 The Services Sector

• Twice the size of the manufacturing sector

• Services offered are to be in line with customer demand
• Services have to be presented in an appealing manner to
sustain customers.
• Needs specialized channels which understand the
characteristics of service delivery
 5 Characteristics of Services

• They are intangible – can only be felt. No visual features like

size, style.
• They are inseparable from their service providers – a 3P
cannot deliver
• They cannot be standardized – custom made and delivered
• Customers are involved to a great degree – define the services
• They are perishable – cannot be stored for delivery later.
Salvage value of an unsold service is zero.
 Channels Used
• Shorter channels than for products
• Some channels used are:
– Direct from service provider to user
– Agents or brokers who primarily bring buyer and seller
together
– Franchisees or contractors
– Electronic channels
• High degree of customization is provided
Unique Distribution Examples
 ITC e-Choupal
• Uses the power of the internet to ‘work’ with farmers

• Links directly with farmers to facilitate procurement of

agricultural produce – wheat, soyabeans and coffee
• Helps farmers with latest and accurate information about
climate, rainfall and market prices of agri-produce.
 E-Choupal Working
• Kiosks set up in villages with computers and internet
connectivity (phone-lines or VSAT)
• Kiosk run by a trained farmer known as a ‘sanchalak’
• Kiosk serves about 600 farmers from 10 villages within a
radius of 5 kms.
• Collection of agri-produce by ITC in warehouse hub
• Presently covers 6500 kiosks in 40,000 villages of 10 states
servicing 4 million farmers (growing)
 HUL Project Shakti
• Meant for empowering rural women
– Creates income generating capabilities in under-privileged
rural women
– Provides a small scale enterprise opportunity

• Members of women self-help groups (SHGs) become Shakti

entrepreneurs
– Direct to home distributors of HUL products
– Offers high returns and low risks
– Supports popular rural brands of the company
 Shakti Working…
• Woman entrepreneur buys goods from the company
• Covers households in nearby villages and canvasses
sales of the company products and their benefits to rural
women consumers
• Typical distributor sells about Rs 10K to Rs 15K per month
and earns about Rs 1000
• Some salient numbers: 80,000 villages through 26,000
distributors (growing)
 Vending Machines
• A cash or card operated retailing format that dispenses
products or services
• Used normally for low value and frequently purchased
items
• Eliminates use of sales people, provides 24X7 service and
placed in consumer preferred high traffic locations
• Evolved to accept bills (notes) and coins on a global basis
 Direct Selling – Eureka Forbes
• First company to directly sell domestic water purifiers and
vacuum cleaners in India
– Selling new concepts – company decided to use the direct
selling route
– Presently works with over 5000 salesmen touching about 1.3
million homes directly and converting about 1500 new
customers every day
– The dynamic and highly motivated sales people are called as
‘Eurochamps’

• EF has since started using ‘dealers’ for servicing industrial

customers
 Amway – Multi-level Marketing
• Founding principles based on freedom, family, hope and
reward. 450 products and 6000 employees world-wide.
– Manufactures and sells world-class consumer products
– All products covered by a 100% money back guarantee
– In India, sources products locally and helps set up
manufacturing facilities
 Amway Features
• Four product categories – Personal care, Home care, Nutrition
and Wellness and Cosmetics
• Distribution and selling network – independent sales
consultants who recruit similar sales people. Each salesperson
earns income on his own sales and on the sales made by
salespeople ‘recruited’ by him.
– Presently in India, has provided business opportunities to 450,000
active and independent business owners.
– Company reaches 3000 locations through a host of logistics
service providers
 Mumbai Dabbawalas (MD)
• Every day in Mumbai, 5000 dabbawalas deliver 200,000
meal boxes to customers without any mix-up
– Collects the food box from the house of the customer
– Deliver the food box at the workplace of the customer
– Returns the empty food box back to the customer house
– Use simple, alpha-numeric codes for identity of boxes
– All this is done using bicycles and public transport
 MD Core Values
• No hierarchy in the organisation
• All members are shareholders of the organisation
• The only source of income for the members – deliver
service with utmost commitment
• Expect quick customer response to maintain delivery
record
• Simple processes, employees capable of multi-tasking
 Key Learnings
• Channel management is done by: use of power bases,
identifying and resolving channel conflicts and co-ordination
• Channel conflicts could occur due to: goal conflicts, domain
conflicts and perception conflicts
• Channel conflicts pass thru’ the 4 stages of latent, perceived,
felt and manifest.
• Conflicts are avoided with the use of power bases of rewards,
coercion, expertise, legitimacy and reference.
• There are 5 styles of conflict resolution: avoidance, aggression,
accommodation, compromise and collaboration
 Key Learnings
• Channel conflicts are resolved by joint membership of
associations, exchanging personnel or arbitration
• Channel management involves the four steps of planning,
organisation structure, control of the channels and measuring
performance for continuous improvement
• Services are distinguished by 5 characteristics of being
intangible, inseparable from service providers, cannot be
standardised, customers are involved in service delivery and are
perishable. Distribution channels should take these into account.
 Key Learnings
• Some unique distribution examples include:
– ITC e-Choupal
– HUL Project Shakti – empowering rural women
– Vending machines
– Eureka Forbes – direct selling
– Amway – multi-level marketing
– Mumbai Dabbawalas