A Brief Review of Channel Governance Distribution Channel Strategy L. P. Bucklin Spring 2000

Channel Governance Definition: The use of hierarchical type controls to coordinate activities throughout the channel instead of market forces –to provide superior end-user service –to motivate members to adhere to a common marketing plan –to limit conflict among channel members Coordination requires the presence of power and its judicious use

Payoff from Coordination Insure effective service delivery –Obtain wide stocking, Reynolds Wrap –Insure similar products, service pattern across all EUI, Pizza Hut –Provide appropriate pre and post-sale services, Cummins, Caterpillar, Ford –Simplify end-user shopping costs, Ford Insure image consistency –Standardized facilities, Pizza Hut –Greater efficiency, Ford, Kraft

Governance Requires Power Power: the ability one one channel member to influence the behavior of another The degree of power depends heavily upon the relative dependence of the governed party The greater the degree of control sought in a channel, the greater the need for a form of governance which will that power

Channel Governance Modes Spot channels -- control through open markets and short-term transactions Administered channels -- control through rewards, expertise, and the power to punish Contractual channels -- control by long term agreements and the power of the contract Vertically integrated channels -- control by ownership and authority of a single firm

Channel Governance Modes Market Based Controls Hierarchy Control Unilateral Governance Bilateral Governance Adminis- tered Contractual Symmetric DependenceAsymmetric Dependence Reynolds Wrap (Intensive distribution) Anasazi (Selective distribution) Cummins Engine (long term incentive) Pizza Hut (franchise contract) Kraft Food (integration)

Intensive Distribution Selectivity by Reseller Type Selective Distribution by Market Area Wholly Owned Distributor SBU with own Narrow Line Resellers Functional Integration (Separate L&I* functions) Exclusive Distribution Exclusive Distribution with Exclusive Dealing Franchised Distribution Administered Channel Contractual Channel Integrated Channel Channel Structure Tools Degree of Channel Closure--> Form of Channel Governance *CBs=competitive brands <--Greater Power Source

Intensive Distribution Reynolds Selectivity by Reseller Type Anasazi, HP Selective Distribution by Market Area Ford Wholly Owned Distributor Kraft (USA) SBU with own Narrow Line Resellers Ingersoll Rand Functional Integration (Separate L&I* functions) Polaroid Exclusive Distribution Cummins Exclusive Distribution w/ Exclusive Dealing Ford Franchised Distribution Pizza Hut Administered Channel Contractual Channel Integrated Channel Governance Tools *L&I=Logistic & Informational <--Greater Power Source Form of Channel Governance Degree of Channel Closure-->

Market Structure & Dependence The power of a national (supplier) brand – Reynolds, HP The role of personal selling to the end-user – Anasazi Number & strength of competitors – Reynolds, Anasazi Relative reseller scale, breadth of product line, legal – Kraft, HP Printer, Ford, Cummins Reseller horizontal organization – Pizza Hut

Behavioral Tools Employing reward and monetary incentives – Exclusivity: Cummins – Promotional programs: Reynolds Employing coercion(threats): Cummins, Pizza Hut Employing legitimate authority – Contract—Pizza Hut, Ford, Cummins –Integration (hierarchy)--Polaroid, Pizza Hut Employing expertise: influence through skills, knowledge, social position. Caterpillar, Anasazi Authority sharing: Pizza Hut, Caterpillar

Trust--The Power Facilitator Trust reflects another's belief that you will act in their individual or collective interest Trust increases in importance as channel control becomes more important and the length of the relationship is extended Trust is built upon prior actions, visibility of reputation, mutual understanding, fair dealings

Governance by Integration Desirability –Enhance ability to coordinate channel –Heavy sunk investments in channel partners –High potential for partner opportunism –Improve channel efficiency through routinization, reduction of sales costs Problems encountered: –Integrated level faces intense competition –Major assortment discrepancy between levels –Units at each level operate at different scale –High monitoring costs –Loss of efficiency from bureaucracy, conflict

The Irony of Power--Conflict Use of power within a channel is intended to constrain the behavior of another party Constraints which weaken or diminish the position of the other party lead to conflict Conflict erodes coordination and the effectiveness of the channel The potential for conflict increases as the degree of control, dependence increases

Sources of Conflict Changes in system power balance, environment Unexpected changes in system policies, norms Dependence not offset by perceived reward Failure to achieve agreement on channel model The level and fairness of profit distribution The use of dual or multiple distribution channels The extensive use of coercion to achieve control The inability to achieve adequate profit return

Conflict Management Techniques Institutionalized methods Use of third parties Contract management Control over management style Incentive management System component evaluation Limitation of multiple channel types

Bi-Lateral Governance High, Mutual Dependence Mutual commitment to welfare of channel partner, build integration, minimize conflict Creation of joint control systems: Pizza Hut, Caterpillar –Focus upon issues of mutual concern –Mechanisms enable all parties to participate in decisions –Procedures developed for resolving differences –Methods created for communication of needs, concerns –General norms for behavior established Joint decision making systems: resistant to relationship changes required by new conditions

Governance Requires Appropriate choice of governance mode from: –Recognition of potential payoff from channel coordination –Market conditions underlying power positions –Channel information & logistical requirements – The selection of partners with similar goals Application of appropriate degree of channel closure Implementation of technologies appropriate to diminishing conflict among channel members