Disagreement between channel members

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It is quite conceivable that the independent firms that constitute a channel of distribution (i.e., manufacturer, wholesaler, retailer) may sometimes find themselves in conflict with each other. The underlying causes of conflict are the divergent goals that different firms may pursue. If the goals of one firm are being challenged because of the strategies followed by another channel member, conflict is the natural outcome. Thus, channel conflict may be defined as a situation in which one channel member perceives another channel member or members to be engaged in behavior that is preventing or impeding it from achieving its goals. Disagreement between channel members may arise from incompatible desires and needs.

Weigand and Wasson give four examples of the kinds of conflict that may arise: A manufacturer promises an exclusive territory to a retailer in return for the retailer’s “majority effort” to generate business in the area. Sales increase nicely, but the manufacturer believes it is due more to population growth in the area than to the effort of the store owner, who is spending too much time on the golf course. A fast-food franchiser promises “expert promotional assistance” to his retailers as partial explanation for the franchise fee. One of the retailers believes that the help he is getting is anything but expert and that the benefits do not correspond with what he was promised. Another franchiser agrees to furnish accounting services and financial analysis as a regular part of his service. The franchisee believes that the accountant is nothing more than a “glorified bookkeeper” and that the financial analysis consists of several pages of ratios that are incomprehensible. A third franchiser insists that his franchisees should maintain a minimum stock of certain items that are regularly promoted throughout the area. Arguments arise as to whether the franchiser’s recommendations constitute a threat, while the franchisee is particularly concerned about protecting his trade name. The four strategic alternatives available for resolving conflicts between channel members are bargaining, boundary, interpenetration, and superorganizational strategies. Under the bargaining strategy, one member of the channel takes the lead in activating the bargaining process by being willing to concede something, with the expectation that the other party will reciprocate. For example, a manufacturer may agree to provide interest-free loans for up to 90 days to a distributor if the distributor will carry twice the level of inventory that it previously did and will furnish warehousing for the purpose. Or a retailer may propose to continue to carry the television line of a manufacturer if the manufacturer will supply television sets under the retailer’s own name (i.e., the retailer’s private brand). The bargaining strategy works out only if both parties are willing to adopt the attitude of give-and-take and if bottom-line results for both are favorable enough to induce them to accept the terms of the bargain.

The boundary strategy handles the conflict through diplomacy; that is, by nominating the employee most familiar with the perspectives of the other party to take up the matter with his or her counterpart. For example, a manufacturer may nominate a veteran salesperson to communicate with the purchasing agent of the customer to see if some basis can be established to resolve the conflict. For example, North Face, the manufacturer of high-performance outdoor clothes, is expanding beyond the $5 billion specialty outdoor market to the broader $30- billion casual sportswear market. To implement the strategy, it plans to increase the number of stores selling North Face after 2001, from 1,500 specialty stores up to 4,000 retailers. This has upset the specialty stores since they fear that the expansion will undercut the brand, putting pressure on their margins. To resolve the conflict, the North Face salesperson may meet the specialty store buyers to talk over business in general. In between the talks, he or she may indicate in a subtle way that the company’s decision to broaden the distribution would be mutually beneficial. In the end, the specialty stores will reap the benefits of the brand name popularity triggered by the mass distribution. Besides, the salesperson may be authorized to propose that his or her company will agree not to sell the top of the line to “new retailers,” thus ensuring that it will continue to be available only through the specialty stores. In order for this strategy to succeed, it is necessary that the diplomat (the salesperson in the example) be fully briefed on the situation and provided leverage with which to negotiate. The interpenetration strategy is directed toward resolving conflict through frequent informal interactions with the other party to gain a proper appreciation of each other’s perspectives. One of the easiest ways to develop interaction is for one party to invite the other to join its trade association. For example, several years ago television dealers were concerned because they felt that the manufacturers of television sets did not understand their problems. To help correct the situation, the dealers invited the manufacturers to become members of the National Appliance and Radio-TV Dealers Association (NARDA). Currently, manufacturers take an active interest in NARDA conventions and seminars.

Finally, the focus of superorganizational strategy is to employ conciliation, mediation, and arbitration to resolve conflict. Essentially, a neutral third party is brought into the conflict to resolve the matter. Conciliation is an informal attempt by a third party to bring two conflicting organizations together and make them come to an agreement amicably. For example, an independent wholesaler may serve as a conciliator between a manufacturer and its customers. Under mediation, the third party plays a more active role. If the parties in conflict fail to come to an agreement, they may be willing to consider the procedural or substantive recommendations of the mediator. Arbitration may also be applied to resolve channel conflict. Arbitration may be compulsory or voluntary. Under compulsory arbitration, the dispute must by law be submitted to a third party, the decision being final and binding on both conflicting parties. For example, the courts may arbitrate between two parties in dispute. Years ago, when automobile manufacturers and their dealers had problems relative to distribution policies, the court arbitrated. Voluntary arbitration is a process whereby the parties in conflict submit their disputes for resolution to a third party on their own. For example, in 1955 the Federal Trade Commission arbitrated between television set manufacturers, distributors, and dealers by setting up 32 industry rules to protect the consumer and to reduce conflicts over distribution. The conflict areas involved were tie-in sales; price fixing; mass shipments used to clog outlets and foreclose competitors; discriminatory billing; and special rebates, bribes, refunds, and discounts. Of all the methods of resolving conflict, arbitration is the fastest. In addition, under arbitration, secrecy is preserved and less expense is incurred. Inasmuch as industry experts serve as arbitrators, one can expect a fairer decision. Thus, as a matter of strategy, arbitration may be more desirable than other methods for managing conflict.

Distribution strategies are concerned with the flow of goods and services from manufacturers to customers. The discussion in this article was conducted from the manufacturer’s viewpoint. Six major distribution strategies were distinguished: channel-structure strategy, distribution-scope strategy, multiple-channel strategy, channel-modification strategy, channel-control strategy, and conflictmanagement strategy. Channel-structure strategy determines whether the goods should be distributed directly from manufacturer to customer or indirectly through one or more intermediaries. Formulation of this strategy was discussed with reference to Bucklin’s postponement-speculation theory. Distribution-scope strategy specifies whether exclusive, selective, or intensive distribution should be pursued. The question of simultaneously employing more than one channel was discussed under multiple-channel strategy. Channel-modification strategy involves evaluating current channels and making necessary changes in distribution perspectives to accommodate environmental shifts. Channel-control strategy focuses on vertical marketing systems to institute control. Finally, resolution of conflict among channel members was examined under conflict-management strategy. The merits and drawbacks of each strategy were discussed. Examples from marketing literature were given to illustrate the practical applications of different strategies.