Channel conflict

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Channel conflict occurs when manufacturers (brands) disintermediate their channel partners, such as distributors, retailers, dealers, and sales representatives, by selling their products directly to consumers through general marketing methods and/or over the Internet.

Contents

Some manufacturers want to capture online markets for their brands but do not want to create conflicts with their other distribution channels. The Census Bureau of the U.S. Department of Commerce reported that online sales in 2005 grew 24.6 percent over 2004 to reach US$86.3 billion. [1] By comparison, total retail sales in 2005 grew 7.2 percent from 2004. [1] These numbers made the online marketplace attractive to manufacturers but raised the question of how to participate without harming existing channel relationships.

According to Forrester Research and Gartner from 2007, despite the rapid growth of online commerce, an estimated 90 percent of manufacturers did not sell their products online. Of these, 66 percent identified channel conflict as their single biggest issue[ citation needed ]. However, results from a survey show that click-and-mortar businesses have an 80% greater chance of sustaining a business model during a three-year period than those operating just in one of the two channels.

E-commerce is the most popular second distribution channel because of its low overhead expenses and communication costs. This advantage is also a disadvantage, since consumers can also communicate less expensively and more easily with one another in the online marketplace. Therefore, price and product differentiation are more challenging in online markets. [2]

Channel conflict can also occur when there has been overproduction. This results in a surplus of products. Newer versions of products, changes in trends, insolvency of wholesalers and retailers, and the distribution of damaged goods also affect channel conflict. In this connection, a company's stock clearance strategy is important.

To avoid a channel conflict in a click-and-mortar business, it is necessary to ensure that both traditional and online channels are fully integrated. This reduces possible confusion with customers while providing the business benefits of a dual channel. [3] [4] [5] [6]

Manufacturers today sell their products through a broad array of channels. Since most manufacturers sell through several channels simultaneously, channels sometimes find themselves competing to reach the same set of customers. When this happens, channel conflict is virtually guaranteed. In turn, such conflict almost invariably finds its way back to the manufacturer.

This can also be termed as a situation when a producer or supplier bypasses the normal channel of distribution and sells directly to the end user. Selling over the Internet while maintaining a physical distribution network is an example of channel conflict.

Channel conflict comes in many forms. Some are mild, merely the necessary friction of a competitive business environment. Some are actually positive for the manufacturer, forcing out-of-date or uneconomic players to adapt or decline. Other conflicts, however, can undermine the manufacturer's business model. Such high-risk conflicts generally occur when one channel targets customer segments already served by an existing channel. This leads to such a deterioration of channel economics that the threatened channel either retaliates against the manufacturer or simply stops selling its product. The result is disintermediation, in which the manufacturer suffers.
The two main disintermediation causes are finance and the internet.

Finance

Elimination of financial intermediaries (banks, brokers) between the suppliers of funds (savers/investors) and the users of funds (borrowers/investees). Disintermediation occurs when inflation rates are high but bank interest rates are stagnant and the bank depositors can get better returns by investing in mutual funds or in securities.

Internet

Elimination (by the online sources) of the traditional intermediary between the seller and the buyer (such as an agent, broker, or reseller), or between the source and the recipient of information (such as an agency, official, or gatekeeper).

Type of channel conflicts

There are two types of channel conflicts.

Vertical channel conflicts

Vertical conflict occurs when a manufacturer's action disrupts the supply chain. For example, a manufacturer who normally distributes its products through retail would cause a vertical channel conflict if they start doing direct mail and advertise directly to consumers.

Horizontal channel conflicts

Horizontal conflict occurs among firms at the same level of the channel. For example, two franchises who open two restaurants across the street from each other would be in a horizontal conflict or when one firm in a distribution channel offers lower prices than the members of the distribution channel and therefore attract more customers.

So what do the manufacturers have to do?

Resource dependence theory [7] emphasizes the need for organizations to formulate strategies to enhance their power positions and reduce their environmental dependence in order to achieve sustainable competitiveness. The findings of a research about power-dependence and reseller influence on SME's[ clarification needed ] continued use of online direct sales channels illustrate that to reduce the negative impact of power-dependence imbalance, SMEs should strive to reshape and strengthen their power-dependence position relative to their resellers. For instance, SMEs can strengthen their power-dependence position by providing differentiated service support to better cater to resellers’ needs and by reinforcing their unique values to create mutual dependence between an SME and its resellers. [8] [9] SMEs may also strive to improve their power-dependence position through the improvement of their power among other suppliers of the resellers. Research on power imbalance and power use suggests that a reseller's tolerance level toward a supplier is greatly determined by the supplier's relative power position relative to the reseller's alternative suppliers [10] On the other hand, recent studies have shown that we have to use retailers in order to provide an integrated journey for the customer to decision because, at the evaluation stage of the Consumer Decision Journey, consumers didn't start with search engines; rather, they went directly to Amazon.com and other retail sites that, with their rich and expanding array of product-comparison information, consumer and expert ratings, and visuals, were becoming the most important influencers. [11]

Related Research Articles

E-commerce is the activity of electronically buying or selling products on online services or over the Internet. E-commerce draws on technologies such as mobile commerce, electronic funds transfer, supply chain management, Internet marketing, online transaction processing, electronic data interchange (EDI), inventory management systems, and automated data collection systems. E-commerce is the largest sector of the electronics industry and is in turn driven by the technological advances of the semiconductor industry.

Commerce is the large-scale organized system of activities, functions, procedures and institutions that directly or indirectly contribute to the smooth, unhindered distribution and transfer of goods and services on a substantial scale and at the right time, place, quantity, quality and price through various channels from the original producers to the final consumers within local, regional, national or international economies. The diversity in the distribution of natural resources, differences of human needs and wants, and division of labour along with comparative advantage are the principal factors that give rise to commercial exchanges.

<span class="mw-page-title-main">Retail</span> Sale of goods and services

Retail is the sale of goods and services to consumers, in contrast to wholesaling, which is sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturers, directly or through a wholesaler, and then sells in smaller quantities to consumers for a profit. Retailers are the final link in the supply chain from producers to consumers.

<span class="mw-page-title-main">Distribution (marketing)</span> Making products available to customers

Distribution is the process of making a product or service available for the consumer or business user who needs it, and a distributor is a business involved in the distribution stage of the value chain. Distribution can be done directly by the producer or service provider or by using indirect channels with distributors or intermediaries. Distribution is one of the four elements of the marketing mix: the other three elements being product, pricing, and promotion.

The marketing mix is the set of controllable elements or variables that a company uses to influence and meet the needs of its target customers in the most effective and efficient way possible. These variables are often grouped into four key components, often referred to as the "Four Ps of Marketing."

<span class="mw-page-title-main">Disintermediation</span> Eliminating middlemen from a supply chain

Disintermediation is the removal of intermediaries in economics from a supply chain, or "cutting out the middlemen" in connection with a transaction or a series of transactions. Instead of going through traditional distribution channels, which had some type of intermediary, companies may now deal with customers directly, for example via the Internet.

<span class="mw-page-title-main">List price</span> Price that the manufacturer recommends for a retailer to charge

The list price, also known as the manufacturer's suggested retail price (MSRP), or the recommended retail price (RRP), or the suggested retail price (SRP) of a product is the price at which its manufacturer notionally recommends that a retailer sell the product.

<span class="mw-page-title-main">Reseller</span> Company or individual that buys goods or services for resale

A reseller is a company or individual (merchant) that purchases goods or services with the intention of selling them rather than consuming or using them. Individual resellers are often referred to as middle men. This is usually done for profit. One example can be found in the industry of telecommunications, where companies buy excess amounts of transmission capacity or call time from other carriers and resell it to smaller carriers. Resale can be seen in everyday life from yard sales to selling used cars.

<span class="mw-page-title-main">Online shopping</span> Form of electronic commerce

Online shopping is a form of electronic commerce which allows consumers to directly buy goods or services from a seller over the Internet using a web browser or a mobile app. Consumers find a product of interest by visiting the website of the retailer directly or by searching among alternative vendors using a shopping search engine, which displays the same product's availability and pricing at different e-retailers. As of 2020, customers can shop online using a range of different computers and devices, including desktop computers, laptops, tablet computers and smartphones.

Drop shipping is a form of retail business in which the seller accepts customer orders without keeping stock on hand. Instead, in a form of supply chain management, the seller transfers the orders and their shipment details either to the manufacturer, a wholesaler, another retailer, or a fulfillment house, which then ships the goods directly to the customer.

<span class="mw-page-title-main">Business-to-business</span> Commercial transaction between businesses

Business-to-business is a situation where one business makes a commercial transaction with another. This typically occurs when:

An online marketplace is a type of e-commerce website where product or service information is provided by multiple third parties. Online marketplaces are the primary type of multichannel ecommerce and can be a way to streamline the production process.

Business-to-employee (B2E) electronic commerce uses an intrabusiness network which allows companies to provide products and/or services to their employees. Typically, companies use B2E networks to automate employee-related corporate processes. B2E portals have to be compelling to the people who use them. Companies are competing for eyeballs of their employees with eBay, yahoo and thousands of other web sites. There is a huge percentage of traffic to consumer web sites comes from people who are connecting to the net at the office.

A marketing channel consists of the people, organizations, and activities necessary to transfer the ownership of goods from the point of production to the point of consumption. It is the way products get to the end-user, the consumer; and is also known as a distribution channel. A marketing channel is a useful tool for management, and is crucial to creating an effective and well-planned marketing strategy.

Direct-to-consumer (DTC) or business-to-consumer (B2C) is the business model of selling products directly to customers and thereby bypassing any third-party retailers, wholesalers, or middlemen. Direct-to-consumer sales are usually transacted online, but direct-to-consumer brands may also operate physical retail spaces as a complement to their main e-commerce platform in a clicks-and-mortar business model. In the year 2021, direct-to-customer e-commerce sales in the United States were over $128 Billion.

Customer to customer markets provide a way to allow customers to interact with each other. Traditional markets require business to customer relationships, in which a customer goes to the business in order to purchase a product or service. In customer to customer markets, the business facilitates an environment where customers can sell goods or services to each other. Other types of markets include business to business (B2B) and business to customer (B2C).

Omnichannel is a neologism describing a business strategy. According to Frost & Sullivan, omnichannel is defined as "seamless and effortless, high-quality customer experiences that occur within and between contact channels".

Wholesale fashion distribution refers to the global market of bulk clothing sales, in which producers, wholesalers and sellers are involved in a commercial, business-to-business process.

Recommerce or reverse commerce is the selling of previously owned, new or used products, mainly electronic devices or media such as books, through physical or online distribution channels to buyers who repair, if necessary, then reuse, recycle or resell them.

<span class="mw-page-title-main">Omnichannel retail strategy</span> Business model by which a company integrates both offline and online presences

Omnichannel retail strategy, originally also known in the U.K. as bricks and clicks, is a business model by which a company integrates both offline (bricks) and online (clicks) presences, sometimes with the third extra flips.

References

  1. 1 2 U.S. Dept of Commerce 2004 Report
  2. ↑ Marmorstein, H., Rossomme, J., Sarel, D., (2003) "Unleashing the power of yield management in the internet era", California Management Review, vol. 45, No 3, pp 1-22
  3. ↑ Simons, L.P.A., Bouwman, H., (2006) "Designing a marketing channel mix", International Journal of Information Technology and Management, vol. 5, No 4, pp 229-248 Kaplan, S., Sawnhey, M., (2000) "E-Hubs: the new B2B marketplaces", Harvard Business
  4. ↑ Markides, C., D. Charitou, C., (2004) "Competing with dual business models: A contingency approach", Academy of Management Executive, vol.18, No3, pp 22-36
  5. ↑ Kaplan, S., Sawnhey, M., (2000) "E-Hubs: the new B2B marketplaces", Harvard Business Review, May–June, pp. 97-103
  6. ↑ Chiang, W.K., Chhajed, D., Hess, J.D., (2002) "Direct Marketing, Indirect Profits: A Strategic Analysis of Dual-Channel Supply-Chain Design", Management Science, vol 00, No. 00, pp. 1–20
  7. ↑ Resource dependence theory (e.g., Hillman et al. 2009; Pfeffer 1987; Pfeffer and Salancik 1978; Ulrich and Barney 1984)
  8. ↑ Frazier, G. 1983. “On the measurement of interfirm power in channels of distribution.” Journal of Marketing Research 20(2): 158–166.
  9. ↑ Skinner, S. J., and J. P. Guiltinan. 1985. “Extra-network linkages, dependence, and power.” Social Forces 64:702–7131985.
  10. ↑ Mollenkopf, D. A., E. Rabinovich, T.M. Laseter, and K. K. Boyer. 2007. “Managing Internet product returns: A focus on effective service operations.” Decision Sciences 38(2):215–250.
  11. ↑ Edelman, D. C. (2010). Branding in the digital age: You’re spending your money in all the wrong places. Harvard Business Review, 88(12), 62–69.
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