Bruce W. Bendix, John B. Goodman and Paul F. Nunes
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PDF Help When suppliers attempt channel change, they face numerous
challenges from retaliation to customer rejection. Consider the well-known
clothing manufacturer which targeted online shoppers by unveiling a direct
sales Web site that offered a much larger selection of apparel items than most
of its 3,000 retailers. In addition to selling direct, the company prohibited
its traditional retailers from selling its products on their own websites.
Though online sales were brisk, the company terminated the
program after conflict arose with its traditional retail outlets. Instead, the
company made arrangements for its product to be sold online only through sites
run by its traditional retailers.
Finding channel conflict avoidance at the heart of many
companies' Internet strategies is not surprising. But proper analysis and
appropriate strategies can go far toward minimizing the degree of conflict
participants must overcome. That is why we developed a channel conflict
strategy matrix to identify where conflict may arise and how to weight that
conflict when determining channel strategies.
Channel Conflict Strategy Matrix Companies use the channel conflict strategy matrix (figure
1) to analyze the forces and opportunities for change in their industries
vis-a-vis each existing channel, and to quickly identify optimal change
strategies. The matrix shows the interplay between:
- Market power, a function of where power
resides—with the supplier or with the channel, and
- Channel value, a measure of how much
worth the channel adds for he customer, beyond what the manufacturer
provides.
Four Core Strategies Once a company determines market power and channel value for
each existing channel, the matrix becomes a framework for strategic thinking:
- Pointing to the safest and most effective strategy for each
of four combinations of matrix dimensions
- Showing where to fight out conflicts and where to mediate or
avoid them.
Figure 1: Channel conflict strategy
matrix
Enlarge this image
The four core strategies are: compete, forward integrate,
lead and cooperate.
- Compete. If market power rests with
suppliers and channel value is low, the optimal strategy for the producer is to
compete with the channel. Consider the airlines. They have lowered commissions
dramatically while investing in electronic ticketing. They have also supported
Web travel sites while building and promoting their own direct sites.
However, while travel represents 75 percent of total business-to-consumer
e-commerce volume, less than five percent of travel purchases happen on the
Internet. That's why some airlines are joining together to create a site which
will bring together the regular and promotional pricing of dozens of different
airlines.
- Forward integrate. If market power rests
with the traditional channel, yet channel value is low, suppliers should
consider invading the channel to increase its capacity for value creation. The
supplier must create an innovative offering that the regular channel cannot
duplicate and thus forestall possible conflict.
Three years ago, a
major manufacturer of made-to-order personal computers opened its own retail
stores, defying the conventional wisdom that PC retailing was a dead-end. These
stores have all the traditional display models and sales help, but none of the
inventory, with products and services ordered on location through the Web. This
strategy has enabled the company to sell an average of four non-PC items,
including training, Internet services, financing and solutions bundles, for
every PC sold. These retail stores are now one of the company's strategic
assets, helping to increase operating income at three times the rate of revenue
growth.
- Lead. If the traditional channel's value
is high, but its market power is low, the supplier must take the lead to ensure
that the channel achieves its aims. The combination of high channel value with
low channel power often springs from channel fragmentation, which makes it
difficult for channel participants to agree on and implement new technologies
and processes. So the supplier must take the lead, forcing change while
remaining relatively free of retaliation risk.
This is the route a
provider of networking solutions took. It created a single Web site to sell
directly to customers, and to also provide assistance and coordination between
customers, distributors and value added resellers. The customer perceives the
channel as owned and run by he company itself. But in truth, the independent
channel does the lion's share of the work.
- Cooperate. The greatest potential for
hostility, recrimination and ultimatums arises when the traditional channel's
value and its market power are both high. Channel players in this position see
themselves as equal to their suppliers. Suppliers in these circumstances are
the most tempted to do nothing about channel redesign.
But suppliers'
fears may be exaggerated. They have opportunities to cooperate with the channel
in ways that enhance total value creation. For example, they may create new
channels for new customer segments that conflict only slightly, if at all, with
traditional channels. Several manufacturers have compromised creatively with
their traditional channels to grow their online businesses without conflict.
One car maker, for example, got around the enormous channel power of its
dealers by selling only special colors and models online.
By limiting
the number of products sold online, companies with large portfolios of products
can often reach happy compromises with their channels. For example, a maker of
premium beauty products created a Web site that sells only its lower-priced
brands. A large consumer products company, also a cosmetics maker, took another
approach—selling custom-made cosmetics online, effectively avoiding conflict
with its traditional prepackaged lines.
Seeing Possibilities Consideration of the matrix reveals more strategic choices
than most executives believe exist. In their confusion and anxiety, many CEOs
see only two options—disintermediate the channel or do nothing. Using the
matrix opens new possibilities, especially for implementing strategies focused
on leading or cooperating.
Note: The authors of this Outlook Point of View have also
written a companion article entitled
"Mapping the way to overcoming
channel conflict." Bruce Bendix, associate partner—Corporate Strategy, is
based in Chicago, Illinois, U.S.
John B. Goodman, partner—Corporate Strategy,
Electronics & High Tech, is based in Washington, D.C., U.S.
Paul F. Nunes, associate partner and
senior research fellow—Accenture Institute for Strategic Change, is based in
Cambridge, Massachusetts, U.S.
For more information, please
contact us.
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