How Potential Conflict Drives Channel Structure: Concurrent (Direct and Indirect) Channels
Published 11/1/2005
Author: Alberto Sa Vinhas and Erin Anderson
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Executive Summary
Many practitioners believe that for most organizations, worrying about channel conflict is a waste of time because conflict is unpleasant but inevitable. In contradiction, this study suggests that firms should (and do) factor the potential for conflict into the design of their channels of distribution. The authors examine a firm’s decision to use concurrent channels (own and independent channels transacting in the same geography, selling the same products) in business-to-business markets. They study how and when prominent business-to-business manufacturers, which have long and instructive experience, go to market by concurrent channels.
Ideally, concurrent channels are better for customers (because they can choose the channel better suited to their needs) and better for suppliers (because they increase coverage and, therefore, sales, while matching channel cost-and-capability structures to customer needs). However, concurrent channels eventually create intrabrand competition among the supplier’s channels. When a supplier’s direct and indirect channels meet the same customer, a major point of differentiation, namely, the brand, is absent. It becomes easier for one of the channels to free ride on the presale services the other channel provides. The authors argue that suppliers should favor unitary channels the more the environment favors the collision of own and independent channel types, even though manufacturers have a set of available mechanisms to reduce the ex post level of conflict (e.g., demarcation schemes, quantity discounts). The authors argue that under certain circumstances, these mechanisms are either ineffective or too costly or difficult to implement. In these conditions, rather than deal with the costs of intertype conflict, manufacturers eschew simultaneous vertical integration and independent channels. The authors find five such circumstances. Suppliers limit their use of concurrent channels in going to low-growth markets, in which a loss of a sale to the other channel is more consequential. When customers are likely to invite both channel types to compete for their business, firms also eschew simultaneous use of integrated and independent channels. This is the case when the same customer decision unit behaves differently on different purchasing occasions. In these situations, it becomes more difficult for the manufacturer to implement a demarcation scheme because customers may interact with different channel types over time. Similarly, when customers designate a negotiator to purchase for them as a group, the negotiator is motivated to invite both channel types to compete with each other and with other brands. Channel types also collide when they sell products that are standardized; in this case, there are few ways for channel members to compete other than on services and on price. Customers can more readily free ride on the channel type that provides service, while extracting better prices from the low-service channel. Conversely, when customers buy a brand as part of a bundle of other products, potential channel conflict is reduced. Both channel types have a role to play: Independents sell the assortment, and employees make sure their brand is part of the assortment. Finally, firms are less likely to use concurrent channels for smaller markets.
Furthermore, in a subset of firms that use both channel types in the same market, the authors show that channel types can even be motivated to cooperate when interacting with the same customers by sharing information, agreeing not to compete, jointly calling or offering technical assistance, helping each other secure orders, and operating as a team in general. Three approaches are effective: (1) differentiating each channel type’s product offering; (2) laying down and enforcing rules of engagement ex ante (rather than mediating disputes ex post); and (3) compensating both parties that participate in a sale, regardless of which party books the order. In effect, the supplier acts as an administrator, steering the parties in different directions, giving them different means of engaging the prospect, and compensating the victims of intertype competition.
Biography
Alberto Sa Vinhas is Assistant Professor of Marketing in the Goizueta Business School at Emory University, which he joined in 2002. He received his doctoral degree from INSEAD in Fontainebleau, France, in 2002. His primary research interests include the usage of multiple channels of distribution, channel coordination, the role of distribution channels on product branding, business-to-business marketing, and marketing strategy under uncertainty.
Erin Anderson is John H. Loudon Chaired Professor of International Management and Professor of Marketing at INSEAD in Fontainebleau, France, which she joined in 1994. She received a doctoral degree from the University of California, Los Angeles, in 1982. She specializes in the structure, control, and efficiency of channels of distribution and sales forces. She also examines the governance structures (modes of entry) firms use to launch in new markets. Anderson’s approach to these topics is rooted in new institutional economics, particularly, the transaction cost economics branch. With Anne Coughlan, Louis Stern, and Adel El-Ansary, she has authored the Prentice Hall textbook Marketing Channels. She has published articles, based primarily on original field research, in a number of journals, including Journal of Marketing Research; Journal of Marketing; Marketing Science; Management Science; Organization Science; Journal of International Business Studies; Sloan Management Review; Rand Journal of Economics; Journal of Economic Behavior and Organization; and Journal of Law, Economics, and Organization.
J Marketing Research, Volume 42, Number 4, November 2005
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