Interview Questions

Channels of distribution and logistics

Channel conflict

There is a danger that there will be conflicts of interest and distribution channels will exhibit levels of conflict. For example, suppliers may want to deliver weekly to a retailer, but the retailer wants to hold less stock, so may want daily deliveries. Ideally, channel members should attempt to coordinate their objectives, plans and activities with other intermediaries such that performance of the total distribution system to which they belong is enhanced.

Evidence supports the view that such integrated activity throughout the length of the marketing channel is rare and channel participants are not too concerned with transactions that occur between each of the various channel links. Channel intermediaries are more concerned about dealings between channel members immediately adjacent to themselves, from whom they buy, and to whom they sell.

Channel intermediaries do not function as component members of a distribution system, but operate independently, making decisions concerning their own methods of operation, functions performed and clients served as well as deciding their own objectives, policies and programmes.Therefore, a marketing channel should be a set of interlocking and mutually dependent elements and it is in the interests of all channel members for there to be a substantial degree of co-operation, but an almost inevitable feature is potential conflict between members which should be taken into account when making channel arrangements. It is possible that healthy competition can lead to conflict and management should seek ways to reduce this conflict. Conflict in distribution channels can occur in different forms as follows:

  1. Horizontal conflict is related to competition among similar types of intermediaries at the same level in the channel – e.g. two household textile stores in competition with each another.
  2. Intertype conflict refers to competition among different types of intermediaries at the same level in the channel. This kind of competition has intensified since the advent of ‘scrambled merchandising’ by retailers (where retailers add new product lines that are unrelated to their normal lines of business) e.g. supermarkets have added homewares and clothing to their product lines, offering consumers a wider product range and attaining higher margins. Intertype conflict is significant as it reflects a way in which industries remain efficient and respond to changing market conditions.
  3. Vertical conflict – refers to competition among different levels in a channel. Such problems can be damaging to existing co-operative relationships e.g. in recent years some of the major car producers have been in conflict with their distributors over matters like pricing and discount policies, stockholding levels and exclusivity agreements.

Stress and conflict can be in a dormant state; times of change cause existing stress to peak, leading to hostility among channel members. Some conflict is inevitable in channels and may even be positive in that it can prompt needed changes. The earlier example regarding retailers selling manufacturers’ brands at lower prices than manufacturers wish is an example of vertical conflict. Selling of brands like Levis and Calvin Klein at prices lower than those recommended by manufacturers has given rise to vertical conflict in the channel. Other examples of this type of conflict in the UK recently have been the selling of discounted books and discounted pharmaceutical products by the large retail supermarket groups.

Goal incompatibility

Channel members appear to share a common goal – maximizing the efficiency and effectiveness of the total system. However, each firm exists as a separate legal entity, each with its own employees, owners and other interested parties who help shape its goals and strategies. Some firms’ goals may be incompatible with the aims and objectives of other channel members. This incompatibility can be a primary cause of stress which will ultimately result in conflict. The distribution of channel profits is a typical example.

Each institution will desire the highest possible profit for the whole channel and the natural tendency will be towards co-operation to achieve maximum profit levels. However, each individual firm can be expected to desire the largest obtainable share of total channel profits. The predictable result is conflict over the allocation process.

Even if goals are compatible, there may be disagreements about methods employed: all channel members may agree that increases in volume of a product are desirable, but may disagree on the means employed to accomplish it. Wholesalers may desire more shelf space for better positioning of products in retail stores; retailers may feel that more advertising and promotional effort by the manufacturer would accomplish the objective of an increase in sales. The result is conflict over which method to use.

Position, role and domain incongruence

In a channel consisting of a manufacturer using only wholesalers who sell to retailers, there will be a realignment of the roles and domains of each party. By serving large retailers direct, positions will be re-specified. Changes in position specification, or poorly defined positions, can precipitate conflict among channel members, so the manufacturer must anticipate and understand the expected behaviour of such members. In situations where consensus does not exist, conflict can be expected.

Because each role represents a code of conduct defining the channel member’s expected contribution, adequate performance is critical to maintaining harmony within the channel system. Inadequate performance, or failure to behave in the prescribed manner, frustrates attempts by one firm to predict what the other will do and such frustration is a major cause of channel conflict. Conflict may also arise when there is lack of agreement concerning who is the channel leader (termed the ‘channel captain’). If channel members disagree on the domain of firms in the system, there will be conflict and an inability to achieve goals. If domains overlap, and two or more firms lay claim to the same functions, products or customers, disagreement might lead to hostility. The conflict between car producers and their distributors just described, in part stems from the issue of who controls the channel. In the past it has been the car companies who have been channel captains but market and legislative changes have shifted the balance more towards distributors, giving rise to conflict.

Communication breakdown

Communication breakdowns may cause conflict in two ways:

  1. The failure of one firm to pass on vital information to other channel members. A manufacturer wishing to maintain a competitive advantage may decide not to announce a new product until a national distribution programme has been developed. Retailers, on the other hand, need information about new products as soon as possible to prepare their own strategy for the introductory period.
  2. Distortion within the message process is called ‘noise’ that often arises from confused language nuances. When channel members attach different meanings to language and terminology (e.g. if their roles are unclear and confused) stress results and there is potential for conflict. Speculation surrounding the health of Apple boss Steve Jobs caused problems for the company and its distributors. In January 2009 the annual MacWorld conference normally used to announce new products and developments was cancelled. This caused speculation in the trade about whether or not Jobs would continue. The problem was not so much Jobs’ illness bur rather the rumours about it. In July 2009 it was announced that Jobs was making a good recovery from a liver transplant. Communication breakdowns are common in specialist business areas. Noise arises when functional specialists develop terminology that means little to those outside that business environment. Unclear communication with non-specialists can play a part in developing conflict so the specialist should ensure that communications have been understood.

Differing perceptions of reality

Different solutions to mutual problems can lead to confliction behaviour. Even when channel members have a strong desire to co-operate and goal agreement exists, conflict can occur when perceptions of the real facts differ.

Bare Bellies Update

Dear all, further to my e-mail yesterday, I’ve had clarification that a new system for producing bare belly information will be in place. Please note there will no longer be blank bare belly sheets available in departments. Confused? So was this organization’s staff who received this e-mail. The e-mail was from the organization’s publicity department and was sent to all staff. ‘Bare bellies’ is a term used by printers to denote blank sheets to be printed on. The e-mail related to the production of company promotional material.

Each channel member brings to the relationship different backgrounds and prejudices; facts are likely to be interpreted according to prior experience. All members may agree that the channel is not functioning as effectively as desired; each channel member may perceive a different reason for this lack of effectiveness. Manufacturers may feel that a retailer’s lack of stock is due to failure to maintain adequate safety stock levels and realistic reorder points. The retailer may feel that inventory policies are realistic and that the problem is caused by the manufacturer’s inability to meet scheduled delivery times. Each party is interpreting the situation based upon experience and natural prejudices associated with its own position and role.

Ideological differences

Sometimes there may be a fundamental ideological conflict in channels which stems from big business and small business perceptions of management, particularly concerning the appropriate level of sales effort. For example, a manufacturer may be so satisfied with the performance of a wholesaler in a given territory that pressure is exerted on the wholesaler to expand the line of products on offer, whereas the wholesaler may be satisfied with allowing the business to continue to run in its present form.

In this way, pressures exerted by the manufacturer will lead to stress and conflict in the relationship. If this is an established channel, it is in the interests of everybody to settle the dispute or misunderstanding quickly.

There are several methods of resolving conflict, and it is a task of management to seek ways in which to manage it to avoid it becoming dysfunctional and to harness the energies in conflict situations to produce solutions. Depending on which underlying cause is identified, different strategies can be employed in isolation. Another important factor in the resolution of the conflict will be the weight of power of the channel member seeking to resolve the conflict.

Problem solving

Adopting superordinate goals is a method that refers to goals that are desired by all members caught up in the conflict. Often such goals cannot be achieved by individual channel members, as concerted efforts of all parties are required. Such disputes become more pronounced when the channel is confronted by an external threat, and conflict only dissipates when alternative channel systems emerge.

The threat to existing channel members of new channel arrangements for car retailing in the UK has brought about a reduction in conflict between traditional channel members. Car manufacturers and dealers were challenged by the fact that consumers were increasingly purchasing new cars through a variety of new channels including sourcing them from countries where prices might be lower, the growth of ‘car hypermarkets’ where cars are sourced on the ‘grey market’ and through the Internet. The result has been for existing traditional channel members to adopt superordinate goals and this has resulted in a reduction of conflict between them in an effort to survive.

Permanent conflict resolution requires an integration of the needs of both sides to the dispute so they find a common goal without sacrificing their basic economic and ethical principles. The problem is developing a common goal on which all parties agree. A solution exists to alleviate communications noise in distribution channels. A more efficient flow of information and communications in channels permits members to find solutions to their conflict based on common objectives. Channel communication efforts should be designed to decrease or avoid conflict, e.g. using sales representatives to convey information from wholesalers or retailers implies that the manufacturer is trying to encourage the attainment of both individual and common goals; the function of the sales representative in such cases is that of ‘problem solver’.

Persuasion

This implies that institutions involved draw on their leadership potential. If effective channel management is to be achieved, it is often the case that there will be a need to locate an institution or an agency within the system that is willing to assume this role. Channel leadership is the intentional use of power to affect the behaviour of other channel members and cause them to act in a manner that contributes to the maintenance or achievement of a desired level of performance. Often channel control results from channel leadership and like channel power, the level of control achieved by one firm over others in a channel may be issue specific, e.g. while the manufacturer may have control over pricing, retailers may have control over stock levels. Whether or not control can be exerted depends on the power base of each channel member.

By its nature, persuasion involves communication between conflicting parties. Emphasis is on influencing behaviour to resolve conflict; the primary intention is to avoid or reduce conflict concerned with domain or sphere of influence. Persuasion allows members to reach a consensus resulting in agreement without formal bargaining.

Some years ago a well-known company launched its own brand of cola. The new brand was eagerly stocked by many leading grocery supermarkets who were persuaded to make space for the new brand on their shelves. Inevitably this meant less shelf space for existing brands including some of the best known cola brands in the world.

As if this loss of shelf space was not bad enough, the world’s leading cola brand claimed bitterly that at first glace the new Virgin cola looked remarkably like their own cola brand. They subsequently asked Virgin to withdraw the new brand in its present form and at the same time asked their supermarket customers not to stock it. Needless to say, there were protracted discussions, but after a little time all parties were persuaded to come to a compromise which avoided costly litigation and loss of face. The new cola was altered slightly in appearance, some of the lost shelf space was restored and the new brand gradually made inroads into the market.

Bargaining/negotiations

The difference between bargaining and persuasion is that in the bargaining process stress continues to exist in the system long after agreement is reached. In negotiation, no attempt is made to fully satisfy a channel member. Instead, the objective is to reach an ‘accommodation’ to stop conflict among members. Such a compromise may resolve the episode, but not necessarily the fundamental stress over which the conflict erupted. If stress continues, it is likely that some issue will cause conflict again at some later date.Compromise is a means by which bargains can be reached in the channel. Each party gives up something it desires to prevent or end conflict. Often compromise is necessary to reach domain consensus where persuasion and negotiation draw on abilities of parties involved to communicate.

Politics

Politics refers to resolution of conflict involving new organizations in the agreement-reaching process. Mediation involves a third party, usually to secure settlement of a dispute by persuading the parties to continue negotiation or consider recommendations made by the mediator. Mediation involves understanding the conflicting views of parties in such a way that opportunities are perceived that otherwise may have been missed. The fact that solutions are being offered by a mediator, i.e. somebody external to the dispute, can often lead to a settlement if both parties deem the solutions acceptable. Effective mediation keeps the parties together and clarifies facts so the communication process does not break down. While mediation offers solutions to disputes, channel members are not obliged to accept the solutions.

In arbitration, however, the solution suggested by the third party is binding upon the conflicting parties. Arbitration can be compulsory or voluntary, and when it is the former, parties are required by law to submit their dispute to the third party and be bound by the decision. Voluntary arbitration is a similar process whereby parties are bound by the decision, but the dispute is settled voluntarily.

The question of relying on law enforcement to settle disputes in distribution is imprecise as it is doubtful whether solutions enforced by law can be applicable to future channel disputes in different circumstances. In purely domestic channel management, these mechanisms are not greatly used because of the inability to find a neutral third party whose decision will be accepted by everybody involved in the dispute. However, arbitration is a normal and accepted part of international channel management and is part of the contractual agreement between the parties in channel activities. For example, if an exporter feels that an overseas agent has not fulfilled the terms of an agreement between him or herself and the principal, but the two parties cannot agree as to the remedies for this, then normally the terms and conditions for instituting an arbitration process are written into the original contract and will be instituted to resolve the problem.

Diplomacy

Channel diplomacy is the normal method by which inter-organizational relations are conducted, adjusted and managed by ‘ambassadors’, envoys or other persons operating at the boundaries of member organizations. Normally channel members rely on diplomatic procedures, especially in non integrated systems. Channel diplomats should be the ‘eyes and ears’ of the firms they work for, and should report anything that may be of interest. Such ‘diplomats’ are commonplace in distribution channels at executive level. In this way, the diplomat’s power base is such that it is obvious to the parties with whom the diplomat will interact. Effective channel management strategies provide for more rational decision making within the channel.


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