Supply Side Channel Analysis:

Channel Structure and IntensityChapter 4 – Part 2

Learning Objectives

1. Explain the mechanism by which limiting the number of trading partners raises motivation and power.

2. Describe selectivity as a way to reassure trading partners against the threat of opportunism

3. Forecast when either side (upstream or downstream) will concede to a limitation of the number of their trading partners

4. Describe means of maintaining intensive coverage while containing its destructive effects on the channel

5. Describe the special challenges of multiple channel formats and of dual distribution (parallel usage of third-party and company-owned channels)

Bargaining for Influence over Channel Members• Many manufacturers desire to have a large influence over

their downstream channel members.

• They won’t accept that market outcomes are efficient and the “channel member knows best” premise. These manufacturers have strong views about how a channel member will handle their brands.

• They would like to manage their channel members like they manage their subsidiaries.

Bargaining for Influence over Channel Members• How can manufacturers obtain cooperation from Channel

members?.... • The skillfull use of SELECTIVE DISTRIBUTION!• Selective distribution allows for a downstream channel

member to achieve higher margins and higher volume on a given brand.

• Further, selectivity allows a channel member, such as a reseller, to differentiate its assortment, creating a strategic advantage.

• Hence, a degree of selectivity is an extremely power incentive.

• Selective distribution = Influence

Bargaining for Influence over Channel Members• However, low coverage will present a considerable amount of

OPPORTUNITY COST.

• When is selective distribution worthwhile or the manufacturer? When is influence over a channel member’s behavior worth the opportunity cost of limited market coverage?

• One answer is, the investment is worthwhile when the brand has a premium quality position. To maintain the premium, manufacturers must be sure the brand is presented and supported appropriately, which limits the set of resellers.

Bargaining for Influence over Channel Members• DESIRED COORDINATION• In general, all else being constant, the more the manufacturer

wishes to coordinate activities with the channel member (to direct and align with manufacturers preferences), the more selectively the manufacturer should distribute.

• A drive to control the downstream member will lead into conflict because it will put pressure. An interference in the downstream members management will cause them to resist.

• The manufacturer will need power to overcome that resistance, for example, by offering intrabrand competition, the manufacturer is exercising reward power.

Bargaining for Influence over Channel Members• DESIRED COORDINATION• The concept also reduces the number and variety of players.

With a large heterogeneous group of players, it is difficult for the producer to exert influence over them all primarily because managers have limited resources.

• The manufacturer’s ability to give the proper time, attention and support is strained when there are many channel members. Smaller channel = Simpler to manage

• Simplicity enhances control

Bargaining for Influence over Channel Members• DESIRED COORDINATION• Benefits of selectivity (Manufacturer Perspective)1. Exclusive or limited market coverage means higher average

reseller margins, manufacturer can attract better resellers. (Intensive coverage = low margins = resellers will be unattracted)

2. Dedicated and small group of resellers = Vigorous overall market efforts and can lead to higher customer reach

3. This also leads to motivated resellers, willing to take risk on behalf of the manufacturer with regards to introducing new products or a new brand

Bargaining for Influence over Channel Members• REASSURANCE: Using SELECTIVITY TO STABILIZE FRAGILE

RELATIONSHIPS

• Opportunism - the taking of opportunities as and when they arise, regardless of planning or principle.

• In negotiations between upstream and downstream members, both sides are preoccupied with concerns about what will happen once an agreement has been struck.

• The more vulnerable party will fear that the other side will misuse its power. These fears destabilize the relationship, thereby reducing channel effectiveness.

Bargaining for Influence over Channel Members• REASSURANCE: Using SELECTIVITY TO STABILIZE FRAGILE

RELATIONSHIPS

• If a manufacturer (or its brand) has more influence or power in the channel, for reassurance, they will limit their coverage, thereby increasing their downstream dependence, this is known as dependence balancing. (The same can happen in reverse, if the distributor has more power in the channel, they will limit their assortment)

• In some cases, manufacturers sell some fraction of their product directly (It is only opportunism if the manufacturer if did not inform the downstream member about the intent or there is deception or bad faith involved).

Bargaining for Influence over Channel Members• The Price of Concession: Factoring in Opportunity Cost

• In bargaining away the right to have an unlimited number of trading partners, the manufacturer is making a concession to the downstream channel.

• To assess the price of concession, we look at two circumstances:1. The importance of the market area2. The competitive intensity of the product category

Bargaining for Influence over Channel Members• The Price of Concession: Factoring in Opportunity Cost

• For markets that are major to the manufacturer, the opportunity cost of lower coverage is substantial (The manufacturer will bargain harder or refuse to limit coverage)

• For a minor market area, the manufacturer will concede selectivity more readily. This negligible concession often leads to a source of conflict that grows over time. (Eventually, the manufacturer will reassess and renege on the agreement if a distributor will do very well with its product)

Bargaining for Influence over Channel Members• The Price of Concession: Factoring in Opportunity Cost

• For downstream channel members, they will hesitate to limit its number of brands in a product category when the category is a major one in the channel member’s assortment.

• Downstream members also hesitate to grant selectivity in categories that are intensely competitive. This is an expensive concession: Prospective buyers may lose interest when they realize that many brands are missing from the assortment.

Bargaining for Influence over Channel Members• The Price of Concession: Factoring in Opportunity Cost

• To summarize, for either side, selectivity is an expensive concession when the object of negotiation is important.• For the manufacturer, the market area• For the reseller, the product category

• Selectivity is also expensive when the object of negotiation (market area or product category) is intensely competitive. These concessions are expensive because the opportunity cost of limiting the number of trading partners is great.

SIMULATING THE BENEFITS OF SELECTIVITY WHILE MAINTAINING INTENSIVE COVERAGE• Selective distribution has the benefit of increasing

manufacturers ability to motivate and to control downstream channel members at the cost of reducing healthy intrabrand competition and making it more difficult for the prospective purchaser to find the brand. (The opposite is true with intensive distribution).

• Some manufacturers experiment in search of ways to gain most of the benefits of selective distribution while retaining intrabrand competition and making it easy for the prospect to become a buyer.

SIMULATING THE BENEFITS OF SELECTIVITY WHILE MAINTAINING INTENSIVE COVERAGE• Methods that may be effective (or efficient) means of gaining

the best of both selective and intensive distribution:

• Invest in Brand Building• To generate much brand equity that downstream channel

members will tolerate high intrabrand competition. It is particularly effective for FMCG (Coca-Cola as an example).

• Couple information sharing with frequent introduction of new products that have a low failure rate.• Channel members are willing to maintain ties with upstream

members because of a steady stream of well-marketed new products.

SIMULATING THE BENEFITS OF SELECTIVITY WHILE MAINTAINING INTENSIVE COVERAGE• Methods that may be effective (or efficient) means of gaining

the best of both selective and intensive distribution:

• Offer Brand Variants• - Variations of models of a branded product. The key feature is

that some of the variations are made available only to certain resellers, not to the entire channel. The key to the branded variant strategy is that certain combinations are made available only to selected channel members, giving them a sort of exclusivity.

Going to Market via Multiple Types of Channels• The tendency for manufacturers to go for multiple channels is

in the hope of connecting with ever-more-finely segmented customers. In so doing, manufacturers raise the variety of their coverage.

• Some problems associated with multiple types of channels is:

• Cannibalization• Free-riding

Dual Distribution• Dual Distribution – Going to market via third parties and via

one’s own distribution divisions.

• The issue here is that, when third parties compete, the manufacturer can claim to be neutral, letting the market decide who will win. But when the manufacturer competes with its own customers by running employee-staffed channel operations in parallel, the claim of neutrality is not credible. Favoritism might be suspected by downstream channel members.

Dual Distribution• The Demonstration Argument

• The rationale here is that company outlets can show independents its potential in a brand and suggest better ways to sell it.

• Carrier-Rider Relationships

• Sometimes the most appropriate channel member to carry one’s product to market is another manufacturer’s owned sales force and distribution abilities, also known as Piggybacking.

Dual Distribution• Carrier-Rider Relationships

• In piggybacking, the rider is the firm in need of distribution for its product, the carrier is the other manufacturer who has excess capacity in its distribution system to accommodate the rider’s product.

• The benefit to the rider is to avoid the cost of hiring a sales force or finding an independent channel member.

• The benefit for the carrier is the fee earned by carrying the product and the synergy that results from adding complementary product to its line. (Dove International with Edy’s )

Dual Distribution• Carrier-Rider Relationships

• How to pick the best piggybacking partner?

• Find a firm that is complementary to the product line rather than competitive. (The result in adding a complementary product might increase sales for the current product).

• However, the risk the carrier could decide the rider’s product is such a good complement that it brings out its own version of the product and displaces the rider’s offering.

• Reciprocal piggybacking is a solution to this inherent fragility.