Managing Channel Conflict - Distribution Decisions, Marketing Management | Marketing Management - B Com PDF Download

The option of doing nothing online doesn’t apply to most manufacturers anymore. Any business producing a branded product is compelled to offer a website for potential customers to visit.

Channel conflict occurs when the online activities of a manufacturer conflict with third-party distributors and dealers. For example, Tom Smith sells his widgets online therefore competing with the local hardware store that also retails Tom Smith’s products.

What Tom Smith’s website contains in the way of content, and its features and functionality, is governed by the type of channel conflict management strategy that Tom Smith has chosen.

The 4 common channel conflict management strategies are:

• Differentiation Strategy.
• Dealer Support Strategy.
• Conflict Avoidance Strategy.
• Channel Absorption Strategy.

In this post, I’ll explore each of them in terms of what the strategy is, how it is executed and the sort of business it suits.

Strategy 1: Differentiation Strategy.

DESCRIPTION:

A manufacturer seeks to market or product differentiate online.  In other words, they offer a differentiated product to that which is available in stores.

EXECUTION:

• Different products or offers are sold online than through bricks-and-mortar channels.
• Different markets and/or segments are targeted online than through bricks-and-mortar channels.
• The website often includes a list of bricks-and-mortar distributors.

FOR EXAMPLE:

• A manufacturer might sell bundled products online, but sell individual components offline.
• A manufacturer may service small niche markets online.
• A manufacturer may service non-metro regions online (but metro customers will need to purchase from a bricks-and-mortar channel). (This concept can be applied to any geographic territory.)

THIS STRATEGY SUITS:

• Manufacturers wanting both distribution channels in play.
• Manufacturers with strong branded products that a consumer will actively seek out.
• Manufacturers with low margin products in a highly competitive industry.

Strategy 2: Dealer Support Strategy.

DESCRIPTION: 

A dealer support strategy is used by those manufacturers that do not want to deal directly with the buying public. A common driver of this strategy is the retailer or distributor power, which dictates what a manufacturer can do online.

EXECUTION:

These manufacturers typically use their websites to present product information and support their distributors by doing such activities as:

• Incorporating store or dealer locators or lists of distributors.
• Serving as the repository for company, technical and/or product information.
• Offering after sales support, warranty and repair, installation tips, cross-sells, redemption and other support.
• Permitting distributors to order/buy online but preventing consumers doing it.

THIS STRATEGY SUITS:

• Manufacturers of products that are handled prior to purchase (such as clothes that are tried on for size).
• Manufacturers of products that customer don’t really think about (such as grocery items that have low purchase risk).
• Perishable goods manufacturers.
• Manufacturers that are subject to powerful retailers. (In other words, distributors are strong and loss of shelf space will be highly detrimental to the manufacturer.)
    

Strategy 3: Conflict Avoidance Strategy.

There are those manufacturers that don’t worry about the effects on their businesses or their distributors. They engage in online selling themselves although there is a requirement on them to undertake activities that appease concerns that third-party distribution interests.

EXECUTION:

• A manufacturer recommends trial of a product in-store.
• A manufacturer prominently includes a list of its dealers on its website – thus offering channel choice to the buyer.
• The manufacturer builds cooperative (or co-branded) websites in partnership with major distributors.
• Tiered pricing is used – or pricing is at the same level as the offline environment, thereby affording the consumer little advantage to buying from the manufacturer.
• The manufacturer handles the sale, profit shares with dealers who are required to provide support and service, or continue to push the brand. The dealer earns revenue while the manufacturer picks up the market intelligence of what its customers want.
• In the spirit of compromising, a manufacturer might also use its direct online selling for the purpose of presenting mutual benefits to its dealers.

For example:

• By sharing market, customer and competitor information.
• By sharing online profit with their distributors.

THIS STRATEGY SUITS:

• Manufacturers of high value goods (such as cars or large appliances).

Strategy 4: Channel Absorption Strategy.

The best example of this strategy in action is Dell which abandoned third-party distribution and pioneered selling solely online.

This is a pure price-play tactic – a strategy that is well suited to the Internet channel.

There are those manufacturers who do not care about offline line or third-party channels. In this instance, they build their own brand, strip out costs by heading through an automated purchase process that’s online, and pass on cost savings in the form of reduced prices.

A variation of this strategy may be a partial absorption.

This occurs where a manufacturer absorbs or takes a shareholding in major distribution channels to avoid the conflict altogether, as was the case in the deal struck that allowed FogDog to retail Nike products in return for a Nike-held 12% stake.

THIS STRATEGY SUITS:

• Manufacturers with strong brand power and weak distributors.