Channel Management

Knowledge Center

What is a Distribution Channel?

A distribution channel is comprised of an array or set of businesses which collectively perform all of the activities needed to move a product and its title from production to consumption.

Typical parties in a distribution channel are:

• Manufacturer/Producer
• Agents
• Wholesalers
• Retailers
• Industrial Distributors
• (Industrial Users)

What is Physical Distribution?

Physical distribution, also known as logistics, is the total of activities aimed at organizing and moving products through the channels: ordering, transporting, storing, handling and inventory control.

Channel members add value to the distribution channel by:

• Place Utility: Ensuring that the right amount of products is available at the right place.
• Time Utility: Ensuring that the right amount of products is available at the right time.
• Providing various value added services, such as:
  • Marketing/Promoting/Informing
  • Financing/Risk Taking
  • Storing
  • Packaging
  • Transporting
  • Merchandising
  • Selling/Contacting/Negotiating
  • Ordering/Matching

What is Channel Management?

Channel Management is an organizational concept that involves the selection, measurement and management of distribution channel parties. Alternatively it can be described as the development of policies and procedures to gain and maintain the cooperation of various parties within a sell-side distribution channel.

There are 4 major activities in channel management:

• Selecting the (type of) partners as well as the number of them (channel length)
• Managing the channel partners
• Motivating the channel partners
• Evaluating the channel partners

What is a Channel Conflict?

A channel conflict is a dispute or discord arising between two or more channel partners, when one partner's actions prevent the other channel partner(s) from achieving its goals (in terms of business, sales, profitability, market share, etc. These conflicts are natural and bound to happen, no matter how well the distribution channels are designed and managed, because the interests of the channel partners don't always align with each other. The firm, therefore, has to bring the channel members together to work towards the overall goals of the company instead of their channel's goals by establishing Channel Coordination.

Types Of Channel Conflicts

• VERTICAL CHANNEL CONFLICT: Conflict arises between members from different levels in the channel. For example, a conflict between a wholesaler and a retailer.
• HORIZONTAL CHANNEL CONFLICT: Conflict arises between members from the same channel level. For example, a conflict between distributors, or between wholesalers.
• MULTI-CHANNEL CONFLICT: Conflict arises between members from two different channels. For example, manufacturers selling their products directly to large supermarkets results in a conflict with their own independent distributors.
• INTER-TYPE CHANNEL CONFLICT: Conflict arises when channel members dealing with a particular product start dealing with new products outside their product range. For example, large retailers entering new product lines end up challenging the small and concentrated retailers.

Causes Of Channel Conflicts

• ROLE AMBIGUITY: An uncertain act by a channel member due to lack of clarity in roles and rights may lead to conflict among the members.
• INCOMPATIBLE GOALS: When the manufacturer and the member(s) do not work towards the same goals, resulting in conflicting actions.
• MARKETING OR STRATEGIC MIS-ALIGNMENT: A conflicting brand perception may be created in the minds of the consumer if channel members promote a product in different ways, leading to different brand images of the same product.
• DIFFERENCES IN MARKET PERCEPTION: The differences in the understanding of the market and the level of penetration in a particular region, may reduce the channel member's interest in capturing the market.
• RESISTANCE TO CHANGE: When the channel members do not accept changes (in the distrubution strategy) proposed by the manufacturer.
• IMPROPER GEOGRAPHIC OR DEMOGRAPHIC DISTRIBUTION: In case the manufacturer doesn't allocate enough territory to the channel members in order to function profitably.

Potential Consequences Of Channel Conflicts

• PRICE WARS: Partners compete overly aggresive with each other on the grounds of price, leading to customers deferring the purchase to avail the best deal or cherry picking the best options from each channel (e.g., asking for professional advice in the shop but buying it cheaper online).
• CUSTOMER DISSATISFACTION: Channel conflict might result in the channel members showing less interest in the firm's products, thereby leading to resentment from the customers towards the brand.
• SALES DETERIORATION: With the reduced interest of the channel members in the firm's products and the growing resentment of customers towards the brand, the customers tend to move towards competitor products.
• EXIT OF DISTRIBUTORS: The dissatisfaction amongst distributors due to channel conflict, may result in them leaving the channel.
• POOR PUBLIC RELATIONS: Dissatisfied channel members criticize the firm and/or its products, damaging the product's or firm's reputation.

Managing Channel Conflicts

Some amount of channel conflicts might actually be constructive for the channel members, leading to healthy competition amongst them and a better adaptation to changing environment. However, excessive conflict may turn out to be damaging to the business. In other words, it's not possible or necessary or advisable to try to completely stop them; rather channel conflicts have to be managed effectively. Following are some of the strategies in managing channel conflicts:

• STRATEGIC EXPLANATION: At times, providing a strategic justification to the channel members that they serve distinct segments, and hence do not compete directly, may reduce the chances of conflict.
• REGULAR COMMUNICATION: The channel leader should obtain regular feedback from the channel members to know about the market trends and dynamics, and the issues and conflicts faced by them.
• CO-OPTATION: The manufacturer may include prominent channel members or an independent expert in its high-level meetings and planning process. Thus, acknowledging their importance and listening to their opinions may lead the channel members to lesser conflicts with the manufacturer.
• DIPLOMACY, ARBITRATION, AND MEDIATION: If the conflict is severe, important or chronic, channel members may resort to stronger means, such as (1) Diplomacy (either side sends a representative to meet with the counterpart and resolve the conflict), (2) Mediation (a neutral, skilled third party attempts to resolve the issue), or (3) Arbitration (the involved parties agree to meet one or more arbitrators and accept their decision).
• JOINT MEMBERSHIPS: Firms may encourage joint memberships in trade associations. These associations may consider and attempt to resolve the issues between the manufacturers and channel members.
• SUPERIOR GOALS: Establishing superior goals for the firm helps in aligning the individual goals of the channel members, and reduces conflicts.
• DUAL COMPENSATION: This includes paying existing channels for sales made through new channels.
• FAIR PRICING: Providing an equal price or less differences in pricing and a fair margin to channel partners from various territories, helps in resolving the conflicts (which are often caused by price wars).
• EMPLOYEE EXCHANGE: Exchanging employees between two or more channel levels results in the participants understanding the other's perspective.
• LEGAL LAWSUIT: If nothing else proves effective, the channel member may file a lawsuit.

Sources:
Kotler, P. and Keller, K.L. (2016) "Marketing Management", 2016, pp. 675-678
Prachi, M. (2019), "Channel Conflict", The Investors Book

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