Marketing Channel 2003

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CHAPTER 6 CHANNEL POWER:

Getting It, Using It, Keeping It

Power

Power is the ability of one channel member (A) to do something it otherwise would nothave done.Power is the potential for influencePower and cooperationPower is a tool

Why marketing channels require Power

To avoid cost and garner revenue

What is best for system may not be best for each member Malevolent vs. Benevolent

Power as Mirror Image of Dependence

Specifying dependenceUtilityAvailability of alternate sourcesUtility x scarcity of alternative sources

Power as Mirror Image of Dependence

Measuring dependence directly

Utility can be measured by:Benefits offered

Understanding of channel partner goalsPerception of value

Inventorying bases of power Ease of replacement

Potential competition

Existing competitionSwitching cost

Measuring dependency via Proxy Indicators

%age of sales or profits provided by u (utility and switching cost)Role performance in comparison with competitors (Alternatives)

Limited application in sellers market

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Superb role performance creates dependence because excellence is scarce andvaluable

The Greatest Source: Reward Power

A reward is a benefit given in recompense to a channel member for altering its behavior Producer must have good value proposition to the end user Absence of value cannot be compensated by the reward

Producer must pass 5 thresholds:Quality LevelPriceTerms o tradeProducer Reputation

Reliable DeliveryChannel initiatives leading to reward power are:

Boosting resellers capabilitiesExcelling in logistics

Four More Sources of Power

Coercive Power

It stems from Bs expectations of Punishment by A, if B fails to conform to A s influence. Itinvolves any negative sanction or punishment of which a firm is perceived to be capable of.

Slotting feeReduction in marginsWithdrawals of rewards previously grantedSlowing down of shipments

Coercive Power

Coercion is viewed as attack Provokes self defenseIndifference or withdrawal is a reaction to low rewards but a counter attack is a reaction to

coercionCoercion is less functional over the long run. Not to be used unless all other avenues to evoke change have been used.

Reactions: Coercive Power

May be immediate or delayed

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Target downgrade the value estimation by:Dissatisfaction with the financial returnsLess satisfaction with non financial side of relationshipPerceive relationship as more conflictual

Outcomes : Coercive Power

Target is less cooperative (Short run)Low level of trust (Medium run)Low level of commitment by target (Long run)

Use coercive power when benefit is worth the opportunity cost

Expert Power

It is based on the targets perception that the influencer has special knowledge , expertise thatis useful and that the target does not possess it self Durability of expert power can be increased by:

Dole out expert power in small portions, always retaining enough vital data to exert the power Invest in continuous learning 2. Transmission of customized data only.

Expert Power Difficulties in exercising expert power

Trust

StatusIndependent mindset

Legitimate Power

Power from contract agreement or organizational relationshipsIt stems from the target companys sense that it is in some way Obligated to comply withthe requests of the influencer Target feel Morally , Socially and/or legally constrained to feel a sense of duty ,of being

bound to carry out the influencers request

Sources of responsibilityLegal Legitimate Power (Objective)Traditional Legitimate Power (Ephemeral)

Legitimate power stems from norms, values and beliefs Norms to be build are:

SolidarityRole Integrity

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Mutuality

Referent Power

It exists when B views A as a standard of reference and, therefore wishes to identify

publicly with

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The Balance of Power Net DependenceImbalanced dependenceTolerating Imbalance Dependence

Net dependence

Dependence is never entirely one wayCountervailing power must be assessedHigh and balanced power increased coordination through creating win- win situation andencouraging cooperation thus reducing exploitation.

Imbalanced dependence: Is exploitation InevitableMore dependent party suffer economically as well as in terms of non economic benefits

Asymmetric relationships tend to be conflictual

Imbalanced dependence:Countermeasures for the weaker party

Developing alternatives to AOrganizing a coalition to attack AExiting the situation, removing itself for danger by no longer seeking the benefits A

provide.

Tolerating Imbalance Dependence No ReactionUnstable environmentStable environmentsEquitable treatments

Distributive JusticeProcedural Justice

Exercising Power

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Session 4 GAP ANALYSISCHANNEL GAP

The channel that both1. Meet service output demands2. Does so at minimum cost of performing the necessary channel flowA channel system that is not zero based has either demand side gaps, supply side gaps or both.

Sources of Gaps.

Key questions:1. What non-valued functions can be eliminated without damaging customer or channel

satisfaction?2. Are there to be any redundant activates? Which of them could be eliminated to result in

the lowest cost for the entire system? Is there a way to eliminate, redefine, or combinecertain tasks in order to minimize steps in a sale or reduce its cycle time?

3. Is it possible to automate certain activities in a way that reduces the unit cost of getting products to market, even though it will lead to increased fixed costs?

4. Are there opportunities to modify information systems to reduce the costs of prospecting,order entry, or quote generation activities?

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Sources of Gaps

Most common Gaps due to:Poor thought about target end-users demands for service outputs and the most costeffective manner of delivering them.

Environmental Bounds

Local legal constraints Sophistication of local physical and retailing infrastructure E.g.? Managerial Bounds Lack of knowledge about channel Corporate wide channel savings may create gaps in specific channels (E.g.:

inventory for Europe)

Environmental Bounds

Local Legal Constraints Where to sell How to sell

Sophistication of the local physical and retailing infrastructure Information Technology Recovery mechanisms Sales Return mechanisms

Managerial Bounds Size of organization Desire to control the customer Lack of trust among channel members Lack of knowledge of appropriate levels of investment or activity in channel flow Lack of focus on managing the cost of refund product

Types of Gaps DEMAND SIDE: ServiceValue Gap

SOSSOD too much service output Surfeit of service not valued by customer ( Byerlys ) and thus profits too low

or price too high Check Service Output by Service Output Check Segment by Segment

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Demand-Side Channel Gaps Service value gapnot meeting demand for service outputs Shortfall

Service output level is too low SOD > SOS Oversupply

Service output level is too high SOD < SOS They dont necessarily balance-out Affects of competition

Demand side Gaps These gaps arise in two ways

In Single service output In More than one service output

One SOD is high and other is lowSingle Service Output

In first case , the amount of a service output supplied is less than the amount demanded(SOS < SOD) This leads to undersupplied to the target users Users demand more services than they are getting

1ST Example In on line bill payment example (side bar 5.2) channel efficiency was declined (gap was

created on demand side) due to the less SOS Lack of quick delivery time Lack of information

FIGURE 5-2: ONLINE BILLING AND PAYMENT: GAP ANALYSIS

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FIGURE 5-3: ONLINE BILLING AND PAYMENT: A VIRTUOUS CYCLE

Note:

The B2B process exhibits a similar path, with the added inducement to payers of the developmentof technologies to integrate bill payment information with back-office (accounts payable, inventorymanagement, and ordering) processes.

2nd Example

Similarly( in side bar 5.4) on recorded music retailing shows that sales were declining year byyears.

Reasons :Was too low bulk breaking and assortment and variety have limited the success of

standards music retailers particularly given the rise of online alternative

In second case level of service output produced is high for the target user(SOS > SOD) as compared with demand.

Level of service output supplied is higher than service output desired by the target user. Service is costly to supply and therefore

Supplying unnecessary service leads to higher price It is a sign that channel operating Inefficiently because consumers are not willing to pay

for the high level of services offered to them due to their lower valuation of that services

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More Then One Service Output

It is possible for the level of one service output to be too low while the level of another is

too high. In the example of music retailing

SOSSOD for Customer Service

Extra amount of one service output cannot balance out the shortfall in another service. It is important to get the right combination of services

3rd Example

A small neighborhood variety store offers extremely high spatial convenience but may notoffer as much assortment and variety as a hypermarket and may charge higher prices.

According to a research in USAConsumers are not willing to trade a poor assortment and variety offering for extreme spatialconvenience.In side bar 5.3 of reverse logistics all channel flow cost are raised when returned product is nothandled efficiently.

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Types of Gaps

SUPPLY SIDE: when total cost of all channel flows jointly is too high. Signs:

Inventory found everywhere in channel Too little investment results in inefficient outdated approaches Not enough of one channel flow (bottlenecks)

NOTE:It is possible to have one channel flow priced too high if it enables the other channels to perform more cost effectively such that the entire flow is lower-priced.

Supply Side Gaps

Reasons High cost performance of channel flow due to:

Inferior technology Inefficient handling of returned products

The inefficiency or high cost in one channel flow may not cause a gap as long as itminimizes the overall cost of all flows

Combined Channel Gaps

Identify the source of gap Identify the target segment Perform gap analysis target segment wise Presence of Supply side and Demand side gap at the same time is due to interlinking

between supply side decisions and provision of service outputs on the demand side

COMBINED CHANNELS GAPS

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Postponement-Speculation

Principle of Postponement and Speculation by Louis P. Bucklin .PostponementDesire of both the firms and end users to put off incurring costs as long as possible

Manufacturers Delaying production until orders are received

End-users Delay buying until the last minute, then demand quick delivery

Postponement by both the firm and end user may create demand gap

Postponement-Speculation

SpeculationGoods are produced in anticipation of orders rather than in response to them needs

Manufacturers Goods produced in anticipation of orders Economies of scale Inventory holding costs

End-users

Buy ahead of immediate need Larger quantities to get discounts

Household budget tied up in inventory holding costs

Closing Demand-Side Gaps

1. Offer multiple, tiered service output levels to appeal to different segments

2. Expand or retract amount of service level output to the target market3. Altering the list of segments targeted (re-segmentation by channel flow efficiencies)

Closing Supply-Side Gaps1. Changing roles of current channel members

2. Investing in new distribution technologies to reduce total channel flow costs3. Introducing new distribution function specialists to improve the function of the channel

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Gaps Produced by Bounds

Bounds may remain after other channel improvements are made

Some bounds cannot be eliminated Some bounds can be challenged Make management aware Make the approach customer-driven Establish means to stay in touch with the end-users

Gap Analysis Is Continuing Process Environmental bounds change over time End-user demands for service outputs change

Available distribution technology changes Continuous monitoring and innovating

Chapter 7Managing Conflict to increase Channel Coordination

Channel Conflict The word conflict is derived from the Latin configure, to collide. Channel conflict is a behavior by a channel member that is in opposition to its channel

counterpart. It is opponent centered and direct, in which the goal or object sought iscontrolled by the counterpart.

Competition vs. ConflictCompetition

This is the behavior in which a channel member is working for a goal or object controlled by a third party (such as customer , regulators , or competitors

Competing parties struggle against obstacles in their environment Conflicting parties struggle against each other

Types of ConflictsLatent Conflicts

Incompatibility at such a low level that members do not sense it. .

Perceived ConflictsThese exists when a channel member sense that a opposition of some sort exist: Opposition of view points, of perception of sentiments of interests or of intentions.

It is cognitive i.e. emotionless and mental .

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Felt or Affective Conflict The organization members experience hurtful emotions: tension, anxiety, anger , frustration,

hostility .Manifest ConflictOpposition is visible (manifest) as it is expressed in behavior by either withdrawing support or

blocking each others initiatives.

Measuring Conflict Counting Up the Issues Importance Frequency of disagreement Intensity of dispute Conflict = Importance x Frequency x Intensity

Measuring Conflict Example

The Consequences of Conflict

When Conflict is desirableFunctional conflict

Natural outcome of close cooperation with supplier as cooperativerelationships are noisy and contentious

Influential downstream member is a disputatious one- and is willing to giveand take to push the channel to outperform its competitors.

Peace and harmony vs. indifference

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Dysfunctional conflict

Major Sources of Conflicts in Marketing Channel

Competing goalsMargins Vs. Profits

Differing perception of realityThe attribute of the productThe application it serves and for which segmentsThe competitionReasons are:

Focus Business culture

Solution:

CommunicationIncreased sensitivity

Major Sources of Conflicts in Marketing Channel

Clash of market domainsResearchInventoryPre & Post Sale Support

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Domain Conflict

Responsibility for flows and functions Market domains

Intra-channel conflict

Clash of Market Domains

Intra channel competition Competitor representation Perception of Selectivity/ Exclusivity Multiple types of channels in the same market Unwanted channels: Gray Markets

Fueling Conflict Conflicts begets more conflict Threats

Industrial marketing Channels in developed economiesHow destructive actions impact dealers

Gray Markets

Selling authorized goods through an unauthorized channel Occur when:

Differential pricing to different channel membersPricing differently to different geographic markets

EffectsManufacturer cannot effectively sell at different prices in different markets

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Erodes potential volume for authorized dealers who may also provide after-salesservice

Gray Markets Growing quickly Often tolerated

Violations difficult to detectGray markets sometimes give more category exclusivityCosts of taking action against gray markets often more than the benefitsManufacturer gets greater market coverageMay be an intended channel

Conflicts begets more conflict Conflict creates more conflicts

It happens when relationship has experienced high level of tension and frustration.The foundation of trust are thoroughly eroded by high level of conflicts

Threats Threaten means to imply punishment or negative sanction. Threats raise the temperature of relationship by increasing conflicts and reducing channel

member satisfaction. Threats are perceived as coercion. When coercion handled well, will be overlooked in short term. Forgiven in medium term. Appreciated in long term. In short time horizon, conflict is often handled by the use of aggressive or coercive

strategies.

Industrial marketing Channels in developed economiesIndustrial marketing channels in developed economies are good example of balanced power.Upstream and downstream channel members are powerful within the relationships.Each side use influence strategies in their relationship.

Important relationship encourages non-coercive influence attempt.Channel members hesitate to jeopardize these relationships and realize that coercion cancreate a spiral of aggression and retaliation.One of the best ways for a channel member to gain power is to perform it channel roleexceptionally well.Powerful parties rely on persuasion and communication rather than resorting easily toheavy-handed strategies.Coercion is a channel that is not comparable to coercion in a personal relationship.

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In sum, in marketing channels the use of coercion rapidly escapes the users control.Threats are an extremely potent way to raise conflict.Threats should be used with caution, in the realization that coercion can easily be taken toofar.

How Destructive Actions Impact Dealer Dealers are dependent on narrow range of products and suppliers, which makes them vulnerable todestructive acts by the manufacturer whose line they carry.

Approaches to Resolve the Conflict

One is to try to keep conflict from escalating into the dysfunctional zone in the first place.

(This is done by developing the institutionalized mechanism such as arbitration boards or norms of behaviors)

Other is to use pattern of behavior to try to resolve the conflict after it become manifest.

Institutionalized Mechanism

These mechanism include: Joint membership in trade association. Distributors Channels. Exchange of Personal Program. An appeal to third party (such as Arbitration or Mediation). Or Building Relational Norm.

Third Party Mechanism. Mediation And Arbitration are ways to bring in third parties that are uninvolved with

Channel. Mediation is a process whereby third party attempt to secure settlement of dispute by

pursuing the parties either to continue their negotiation or substantive recommendation. Effective mediation succeeds in clarifying the facts and issues. Mediation also encourage channel members to increase their communication with each

other. Mediation help the parties to devise their own decisions. While an alternative to mediation is Arbitration where third party actually makes a

decision .ArbitrationArbitration can be compulsory or voluntary.

In compulsory Arbitration the parties are required by law to submit their dispute to third party, whose decision is final and binding.

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In Voluntary Arbitration the parties voluntary submit their dispute to third party, whosedecision is final and binding.

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Marketing Channel 2003