2003-July - Coping With Internet Channel Conflict

8/6/2019 2003-July - Coping With Internet Channel Conflict

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B Y Y O U N G H W A L E E , Z O O N K Y L E E , A N D K A I R . T . L A R S E N

C O P IN G W I T H IN TE RN E TC H A N N E L C O N F L I C TI F YOU DO NOT SHLL YOUR PRODUCTS DIRECTLY OVER THE

I N T H R N E T , PEOPLE WILL GO TO YOUR COMPETITORS WHO DO, WHILE IE>OU DO SELL YOUR PRODUCTS DIRECTLY, YOUR DISTRIBUTORS AND DEALERS WILL

DESERT YOU AND ON],Y CARRY PRODUCTS EROM MANUFACTURERS WHO DO NOTCOMPETE WITH THEM. MANUFACTURERS' DiLEMMA [ i o]A S e-business grows at an incredible speed and consumers widelyadopt the Internet in their daily life, manufacturers may have anunprecedented opportunity to develop new marketing and saleschannels [6]. Using Internet channels, manufacturers can sell their

products directly to their customers, bypassing traditional intermediaries suchas distributors, resellers, dealers, and retailers.

|: Additionally, if used properly, Internet chan-nels enable manufacturers to communicatedirectly with their customers [2], provide

consistent purchasing experiences [6],gather richer and more valuable cus-

tomer information, reduce advertisingcosts, and create a new market, while also

providing competitive services and pricingfor consumers. -

As manufacturers change rheir business strategytoward direct online sales, however, the relarionshipbetween manufacturers and intermediaries can deterio-rate [1]. This is called Internet channel conflict, a con-flict that occurs when Internet and traditionalbricks-and-mortar channels destructively competeagainst each other when selling to the same markets. Theprior balance of the power structure between the channelmembers may break down, increasing the risk of" Fman-cial losses, lawsuits, protective legislation, trust destruc-tion, and market shrinkage [3, 5]. IntermediariesI L L U S T R A T I O N BY R O B E R T N E U B E C K E R


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C O N F L I C T OCCURS WHEN PARTIES DISAGREE OVERSUBSTANTIVE ISSUES OR W HEN EMOTIONAL ANTAGONISM CREATES

ERICTION BETWEEN PARTIES. CO NELICT THAT IS DETRIMENTAL MUSTBE REDUCED OR ELIMINATED,

that fear the negative effects ofdisinrermediation may fight backagainst manufacturers. Forinstance. Wal-Mart and HomeDepot warned Black & Deckerthat they would take its productsoff their shelves should Black &CDecker start selling its productsthrough the Internet, just onemonth after it started selling gui-tars online at a 10% discount,Gibson Musical Instrumentsbacked away from its disinterme-diation efforts due to strong resis-tance from intermediaries.Confronted with dealer com-plaints, Ford executives recentlyagreed to discontinue directonline car sales at a future date.According to a recent survey ofthe home furniture industry,66% of manufacturers said Inter-net channel confiict is the biggestobstacle to their online sales.

Because the intensity and fre-quency of channel conflicts con-tinue to increase, channel confiictmanagement is an urgent issue inthe e-business era. Since Internetchannel conflict has not receivedproportionate focus fromresearchers, stakeholders are at aloss, since they do not have theknow-how to cope with theirInternet channel conflicts. In thisarticle, we provide a groundbreak-ing strategic framework, and sug-gest practical guidelines forInternet channel confiict manage-ment.

In general, conflict occurswhen parties disagree over sub-stantive issues orwhen em ot io na l Table l. Internet

INTEGRAT ION TYPEa) M^ company has investigated or will investigate ICC issues with

its ICI to find a solution acceptable to us.b) My company has integrated or will investigate ics ICC management

strategy w ith its ICI to com e up v/ich a decision jointly,c) My company would work with its ICI to fmd solutions to Internet

channel related problems which satisfy both parties expectationsd) ^5y company would exchange accurate information w ith its

ICI to solve ICC problems together,e) M/ company would try to bring all the concerns related to ICC

related issues out in the open so that the issues can be resolvedas the best possible way.f) My company would collaborate with its ICI to come up with ICCmanagemonc decisions acceptable to both parties,

g) My company would try to work with its ICI for a properunderstanding of ICC ptoblen's.

AVOIDING TYPEa) My company would attempt to avoid being "put on the spot"

and try to keep its ICC with its ICI to itself,b) My company would usually avoid open discussion of its differences

related to ICC m anagement issues with its ICI,c) My company would try to stay away from disagreement regarding

ICC management issues with its ICI.d) My company would avoid encounters related to

ICC management issues with its ICI.e) My company would try to keep its disagreement regarding channel

management issues with its ICI to itself in order to avoiddeveloping an uncooperative relationship,f) My company would try to avoid unpleasant exchanges(or relationships) with its ICl.

DOMINATING TYPEa) My company would use its influence over its ICi to get its channel

conflict management ideas accepted,b) My company wou ld use its authority ov er its ICI to make .i channel

management decision in its favorc) My company uses its channel-related expertise for its ICI to make

a channel management decision in its favord) My company is generally firm in pursuing its side of channel

management issues comparing to its ICI.e) My company sometimes uses its channel-related power to win

a competitive channel situation with its ICt.OBLIGINGTYPEa) My company would in general try to satisfy the needs regardingthe channel issues of its ICI.b) My company would accommodate the wishes regarding the

channel issues of its ICI,c) My company would give in to the wishes regarding the channel

issues of its ICI.d) My company w ould a llow concessions regarding the channel

issues to its ICI.e) My company w ould go along with the suggestions regarding

the channel issues of its ICIf) My company would try to satisfy the expectations regarding

the channel issues of its ICI.COMPROMISING TYPEa) My company would try to find a middle course to resolve

an impasse regarding ICC management with its ICI.b) My company would propose a middle ground for breaking

deadlocks regarding its ICC management with its ICI.c) My company would negotiate with its ICI so a compromise

can be reached regarding its ICC management,d) My company would use "give an take" so a compromise

Stronffly ^ ^ ^ 1 ^ ^ ^ StrongiDisagree Agree2 3 4 5 6 72 3 4 5 6 72 3 4 5 6 72 3 4 5 6 72 3 4 5 6 7

2 3 4 5 62 3 4 5 6

2 3 4 5

1 2 3 4 5 6 1 2 3 4 S 61 2 3 4 5 6

1 2 3 4 S 6

1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 S 6 1 2 3 4 5 61 2 3 4 5 6

1 2 3 4 S 6 1 2 3 4 5 6 1 2 3 4 S 6 1 2 3 4 5 4 1 2 3 4 5 6 1 2 3 4 S 6

1 2 3 4 S 61 2 3 4 5 6 1 2 3 4 S 6 1 2 3 4 5 6


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parties. Conflict that is detrimental to an organiza- channel decisions answer the ICCM questions, eachtion must be reduced or eliminated. To this end, organization can identify its predominant Internetresearchers have developed several conflict manage- channel conflict managem ent style thro ugh averagingment strategies. One major effort applies the conceptof concern to the arena of conflict management. Indi-viduals' concerns are defmed as their needs, desires,formal objectives, and standards of behavior.Recently, Rahim developed a general model [7] ofconflict management thatintegrates previous efforts; itconsists oi two concerndimensions (self and others)and five specific strategies(obliging, integrating, avoid-ing, dominating, and com-promising), as illustrated inFigure 1.As a practical approach todeveloping the best Internetconflict management strategy

C o n c e r n ( o rO t h e r s

LO W

HIGH

LO W

Obliging

Avoiding

C o n c e r n f o r S e l fHIGH

Integratinj

Compromis ing

OominaCinIV

Figure l. The conflict

all scores and performing basic statistical calculations.'If two or three styles are found tohave similarly highscores, a focus group study may be used to selectwhich is most appropriate.Stage I I . Searching forOther Success CasesAfter identifying a company'schannel conflict managementstyle, the next step is to get moredetailed information based onthe experiences of other compa-nies. It is important to examineexisting success stories in Inter-net channel conflict manage-ment. "Success" means Internet channel conflict has

management model, i r n -M I I I -r-been fu l ly or part ia l ly resolved by a pplying a specificFor a company, we suggest a four-stage approach, confiict ma nagem ent strategy'. Such stories may bewhich we describe in detail here.Stage I. Iden t i fy ingan Organ i za t ion ' s I n te r n e t Channe lC o n f l i c t M a n a g e m e n t E n v i r o n m e n tIn order to select an appropri-ate Internet channel conflictmanagement strategy, a com-pany must identity its channelconflict management envi-ronment. We suggest thisenvironment can be measuredby adopting and modifyingversion II of Rahim Organiza-tional Conflict Inventory(ROCI-II) , a successflillyapplied instrument designedto identify an individuals oran organization's conflictmanagement style [8] (seeTable 1). Given its successfialapplication in diversified indi-vidual and organizationalbehaviors, this measurementscheme may be adapted tomeasure an organization'sInternet channel conflictmanagement style. In thisstudy, the scheme was revisedto fit the Internet channel conflia domain, and namedthe Internet channel conflict measurement (ICCM)instrument (see Table 1).

Table 2. Internet channelconflict management

success stories.

found in e-business magazines, the news media, andsome practitioner-oriented journals, as well as onWeb sites such as digitalenterprise.org/channels/channei.html. We searched for success stories usingInternet search engines such as Lexis-Nexis, ABI-Informs, Prospect,and Google, with thekeywotds channel con -flict, Internet channel,hybrid channel, andconflict man.'^ement,and found 20 successcases as shown in Table2.-

After analyzing thecases, we identifiedfive channel conflictmanagement strate-gies (see Figure 2):intermediary supportstrategy, differentia-tion strategy, conflictavoidance strategy,channel absorptionstrategy, and compro-mising strategy. InFigure 3 we mapped each case onto its appropriatestrategic domain.

For example, af ter summarion i)f ihc answers marked by all rop managers, aco m -p n y can i dc iu j f y its Incernei channel conHict tnanage mcni .style through ta lci i la i ingbasic sutistics such difference ot mean (pj) andstandard dev ia t ions W,) of"each styleusing the analysis of var iance (ANOVA) technique.

StrategyMarketDifTerentiationStrategy

ProductDifferentiationStrategy

IntermediarySupportStrategy

ConflictAvoidanceStrategyChannelAbsorptionStrategyInformationSharing StrategyProfit SharingStrategy

CompanyXerox Co rp ,Texas InstrumentsSegnTenneco Autom ot ive Inc.Kendall-JacksonAcer GroupGap Inc.Gibson Mustcal Instrume ntsLevi Strauss & Co.H.E. Buct Grocery CoWes S Wi l lyColgate-Palmolive Co.Estee Laudei- Companies Inc.Genera l Motors3MDe l l Com pu te r C o rp ,Gateway Inc.Nike3MVF Corp.We s & Wil lyCompaq Com pu te r

URLhtip://www. erox.comhttp:y/wwvj.ti, comh ccp /'www.sega.comhitp //www ienneco-aiiiornotive.comhttp7/vvww.k).tomhttp://www.ac or. comhctp://www.gap.coiiilictp;//www,glbson.comlitip.//www us , evi.comh[rp://www. heb.comhitp://www.we!andwilly comhttp;//www.colgn e.comh tp llvnwi. elconipsnies.comh ip.//www.gm , coinhttp: //vnvw. 3 m. comhttp://www.dell.comh tp://wvjw.gatewaj'.coinhttp..'/www nike coinhttp: //www. 3 m .comhttp://www.vfc.comKtcp://w ww.vresa n d wil y. comfittp://WWW.5. com paq.com


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StrategyHIGH

Manufacturer'sConcern forIntermediary

Intermediary support strategy is used byrurers with low concern for selt but high concern forintermediaries. In this situation, manufacturers adopta passive Internet channel strategy, and use their Websites to support existing intermediaries. For example,a manufacture r m ay develop e-business infrastructurefor its intermediaries, advertiseproduct information instead ofprodtict sales, andgive e-cus-tomers the location of the nearestlocal intermediaries. Jeans com-pany Levi Strauss developed itsWeb site as an advertising center.Rather than sell its brands online,I.evi Strauss uses its Web site toprovide information about itsbrands and products . The site also provides locationand contact information tor the nearest departmentstores and retailers tha t sell Levis. Using a similar strat-egy, H.E. Butt Grocery Company provides customerswith a list of retailers and their locations on its W ebsite, instead of selling products directly online. Wes &Willy, a boy's casual clothing company, provides thenearest store information with avariety ot resources for children.Finally, Colgate-Palmolive rede-fined its e-business site as an oralhealth information provider.Through oral hygiene FAQs, andinformation in the form of D e n -tal Professional World and KidsWorld, it introduces itsproduc tgroups, but does not sell anyproducts on its Web site.

Differentiation strategy is usedin situations in which manufac-turers have high con cern bot h for self and their inte r-mediaries . Such manufacturers seek ways todifferentiate themselves from their intermediaries. Todo this, they utilize strategies such as market andproduct differentiation to minimize the cannibaliza-tion ofexisting channels.

Using the market differentiation strategy involvesseparatin !, custom ers into groups, andaddressingeach gr( p using different channels. For example,Xerox se :S copy m achines to its small and h om e office(S O H C and retail markets using onlin e direct chan -nels, w e also selling machines to the industrial sec-tor thro ugh regional retailers. Texas ins trum ent s usesthe Internet to sell low-volume high-priced semicon-duc rs to large customers such as Sun Microsystems,while relying on distr ibutors l ike Arrow and Hamil-

Manufacturer's Concern for Sell

ry Support Strategy- Market DHforentiation

ua Oifferentlatioo

Harulacturer 's Concern for SelfL O W

Manufacturer'sConcern lor

Intermediary

In te rmed ia ry Suppor tScraiegy LevL Siraiiss H . Butt Grocery Co.V.fes& Wil ly Cdgaie Pi lmoflve Co.

Di f fe ren i ia t ionStrategy

Automotive allows its wholesale customers, but nrepair shops, to place orders through its Web sites.

Using the product differentiation strategy involveselling different prod ucts thro ugh different cha nnelsKendall-Jackson, a wine producer, initiated onlinwine sales to 13 states. To avoid channel conflic

Kendall-Jackson sold Artsans & Estates, a rarelcarried wine, on its Wsite, while d is t r ibu t inother wines through exising intermediaries. Simlarly, Acer Group selonly bundled products oits Web site, and Sega selgame bundles unavailabl

Figure 2. Internet channel from in te rm ed ia ri es to avoiconnict management cl ia nn el co nf lic ts . Fin ally

G a p Inc. has deve lopematernity clothing lines for exclusive sale on tInternet .

Conflict avoidance strategy \s used by manufacturewith low concern for self and ot hers. Such man ufac

turers engage in onl inselling directly, whis imul taneous ly a t tempin g to alleviate intermedaries ' concerns . Them a n u fa c tu r e r s are scessflil in"sneaking" ind i rec t In te rne t channsales, butonly by makinsome sacrif ices. WheFstee Lauder s tar teCiinique.com to sell icosmetics online , it deve

Figure 3. Success stories o p e d sev era l Str ate gie s tmapped onto their re du ce con flic ts w ith phy sic

stores. For instance, its Wsite advertises gift availabilia t bricks-and-mortar s tores, or r e c o m m e n d s th

pretrial of its produc ts at department stores befopurchasing them online. Through these efforts tmaintain the t rust of its retailers. Estee Lauder drmatically reduces adverse reactions from intermedaries. General Motors also applied the avoidanstrategy. By including lists of dealers and their hompages on its Web site, it gives e-buyers the channchoice between the company itself and itsdealeThe e-buyer can then buy cars from C^Ms Web sdirectly or from the dealers listed onthe GM Wsite. Similarly, 3M started itsonline direct sales wian extended joint W eb site, which included retaile

ns t rumeouXer tTexa:SegaTenneco AuiomotivBKendall-JicktonAcy .G

Internet channel conflictmanagement strategies.


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P O W E R , THE ABILITY TO CONTROL THE DECISIONVARIABLES OF THE MARKETING STRATEGIES OE CHANNEL MEMBERS AT

DIEEERENT DISTRIBUTION LEVELS, IS THE MOST FREQUENTLYRECOGNIZED CAUSATIVE FACTOR OF CHANNEL CONELICTS.Channel absorption strategy., which is the reverse ofrhe intermediary support strategy, is used by manufac-turers with a high concern for themselves and a lowconcern for intermediaries. Such manufacturers adoptan aggressive strategy and push intermediaries to accepttheir decisions. In som e cases, manufacturers sever rela-tionships with previous intermediaries and sell their

prodticts exclusively on the Internet. In other cases,they aggressively merge their previous intermediariesinto their company to remove the channel conflict.Dell employed the channel absorption strategy wheninitiating its pioneering direct online sales. Relinquish-ing the benefits of its previous hricks-and-mortar inter-mediary channels, it soid all its products on theInternet. Using the same strategy, Gateway severed itsrelationship with its previous intermediaries, and be^anbasing its business only on direct Internet sales. Niketook this strategy a step tiirther by making a contract

with Fogdog to sell its products on Fogdog's Web site.As compensation for granting this online sales oppor-tunity to Fogdog.com, Nike got a 12% stake in Fog-dog, even though it still sells its products through itsown Web site, ;uid through traditional retailers.Compromising strategy. This dimension involves useof a give-and-take strategy; that is, manufiicttirers launchonline sales, but also pursue mutual benefits throughsharing market and consumer information, and sharingthe benefits generated by direct sales with intermedi-aries. Two types of compromising strategies exist: infor-

mation sharing-strategy and profit-sharing strategy.The information-sharing strategy involves sharinginformation collected through online sales betweenmanufacturers and intermediaries. For example, 3Mlaunched a joint Web site with U.S. Office Products(USOP), the fourth largest online retailer. 3M has600,000 customer email addresses while USOP has800,000. Instead of competing with each other, theyshare their customers on the same Web site andexchange customer information. Employing a similarstrategy, VF Co rp., the maker of Wrangler, F iealthtex,and jantzen Swiniware, exchanges customer data,such as buying habits, with its intermediaries. Thisstrategy enables VF Corp. to gain more information

raining a trust relationship with retailers [4].Manufacturers that employ the profit-sharing strat-egy share profits derived from online sales with inter-mediaries. For instance, Wes & Willy developed itsWeb site to share profits with its retailers. When aretailer orders an out-of-stock item on its Web site,Wes & W illy sends the item directly to custom ers, butshares profits from the order with retailers. Similarly,Compaq gives intermediaries a 6% agents fee whencurrent clients of intermediaries purchase prod ucts onCom paqs Web site.Stage Ml. Con sider ing Oth er ChannelFactorsBefore making their final choice of channel conflictmanagement strategy, managers should pay specialattention to other channel-related factors such aschannel power, dependency, environment, andproduct characteristics.Channel power, the ability to control the decisionvariables oi the marketing strategies of channel mem-bers at diiTerent distribution levels, is the most fre-qtiently recognized causative factor of channelconflicts. Manufacturers should consider their relativechannel power, and the possibility of retaliation bybricks-and-mortar distributors before deploying anInternet channel. When a manufacturer holds a pow-erful channel position, it may have more concern forself, and may therefore choose more self-orientedInternet cha nnel conflict man agem ent strategies, suchas the differentiation strategy and th e channel absorp-tion strategy.

Channel dependency has three components; therelative size of a businesss contribution to profits; thecommitment of one channel member to anothermem ber in terms of the relative importanc e of the lat-ter s marketing policies; and the difficulty in effort andcost faced by a channel member in attempting toreplace another member ;is a supply source or as a cus-tomer. Fiigh channel dependency is known to pro-mote trust and commitment between channelmembers because of their shared interests. Contraryto channel power, channel dependency positively


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I T IS CLEAR THAT FIRMS MUST INVENT A NEW CHANNELSTRATEGY TO EXPLOIT [INTERNET] OPPORTUNITY,

WHILE MINIMIZING CHANNEL CONELICT PROBLEMS WITHTHEIR EXISTING INTERMEDIARIES.

Channel environment is characterized by specificmarket situations, the existence of consumer groups,and channel-related laws. For example, if competitorsin the same market adopt an Internet channel and aresuccessful, manutacturers will often choose an iiggres-sive strategy focused on their own concerns. The exis-tence of consumer groups monitoritig products canalso affect the strategy selection. For instance, a con-sumer protection group can p rotest the online sales ofgrocery p roduc ts through a site such as www.grocery-gateway.com, since monitoring the quality of groceryproducts purchased online is difficult. Further, chan-nel-related laws can aftect strategy choices. For exam-p l e , witie Web sites such as www.wine.com cann ot selltheir products over some state lines through the Inter-net, since each state has different liquor laws.Product characteristics are those characteristicsthat determine a product's ability to be sold online.Some products are easily adapted to the e-commerceenvironment based on their characteristics. Forinstance, a product with high standardability anddeliverability, such as a computer or an audio CD,can easily be sold via rhe Internet. Manufacturerstend to have confidence in products with featureswell suited to online selling, and therefore tend toapply a more self-concerned strategy. Dell is a goodexample of a company that selected the strongestself-oriented Internet strategy. It gave up its previousbricks-and-rnortar channel based on the strategicjudgment that its products have appropriate charac-teristics for Internet sales.Stage IV. Making a Final Strategic ChoiceAt this stage, managers should make their fmalchoice of Internet channel conflict tnanagementstrategy through the consideration of their channelconflict matiagement environment and other chan-nel factors. Companies do not need to select onlyone strategy. After considering their organizationalresource capabilities, and the costs and beneflts ofmultiple channel conflict management strategies,companies can select and combine multiple strate-gies tor a unique competitive advantage. For exam-p l e , 3M utilized the channel avoidance andcom prom ising strategies, while Wes & Willy applied

ConclusionCompanies are still in the initial stages of enteringInternet sales channels, focusing most of their efforton signaling to the market that they are Web-sawycompanies. Onty a few innovative companies havtaken this strategic opportunity and turned it into asuccess. W hether or not managem ent thinks Internechannels will replace current bricks-and-mortar channels, it is clear that flrms must invent a new channestrategy to exploit this new opportunity, while minitnizing channel conflict problems with their existinintermediaries [9]. To this end, this article has proposed practical guidelines for Internet cliannel conflict management. By suggesting measurement scalefor channel conflict management styles, possiblalternative channel conflict management strategiesand other itnportant channel factors, we hope to helpcomp anies select the approp riate strategy: DREFERENCES

1. Bucklin. CB., Thomas-Graham. P.A.. and Webster, E.A. Channeconflia: when is ic dangerous? McKinsey Q..? (1997), 3643.2 . Frjzier, G .L Organizing and managing channels of distribution, Jou

n a l o f t h e Academy o f Marketing Science 2 7 . 2 (1999). 226-24 0.3 . Ghosh, S. Making business sense of the Internet. Harvard Busin/?';>'(1998), 127-135.4 . Gilbe rt. A. and B acheldor, B. 'I'lic hij; sqiietvc. informationweei- (M17 . 2000), 46-56.5 . Uda, S. Internet channel conflicts. Stores { D e c . 1999), 24-28.6 . Maruca, R.F. Rciailing; confronting the thaliengfs that face brickand-mortar stores. Harvard Business Review 77(1999), I59-1()8.7 . Rahim, M.A. Managing Conflict in Orgatiizations. 3 F . , Quorum BWestport, C : T , 2000,8 . Rahim, M.A. Rahim (hgan iziuional Conflict Invcntory-Il. C'.onsiiPsychologists I're.ss. Palo^Alto, CA, 1983.9 . Shaffer, G., and Zettelmeycr, F. The Internet a.s a medium for marke

in g communications: channel conflict over the provision of informtion. M IT Working Paper E-Commerce Forum (1999).H ). Wilson, R. Manufacturers dilemma: to sell or not to sell directly. WCommerce Today { M a y 15, 1998).Y O U N G H W A L E E ([email protected]) is a Ph.D. cindidare. SystemDivision, University of Colorado at Botilder, C O .Z O O N K Y L E E (z]ee@ut)lnot.uii!.edii) is an iissLsTjnt professor,Dcp:.irtmenr of M anagement, Utiiversit)' ot Nebra-ska-LincoIti, Lincoln, NHK A I R . T . L A R S E N (kai.larsenf^coiorado.cdu) is an assistantprofessor. Information Systems D ivision, University of Colorado atBoulder, CO .Permission to m ak t djf-ital or ha rd copies of all or part o(' this work for personal or clan>cim use is nr an itd witho ur Ice provided tha t tiipies are not matic or distribiitth.1 lut pnio r ccimmi'rciu! advantage and tha t cq>ies bear this notice and th e lul l ci tat ion on t ht l l\'3^e. Til topy othenvise. to republish, lo post on servers or to n-discribuie to lists, requi|iriiir s|x.-cilk permission aiid/or a fee.


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2003-July - Coping With Internet Channel Conflict