when is conflict dangerous

8/11/2019 When is Conflict Dangerous

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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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when is conflict dangerous

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