Channel Conflict Management
Channel conflict is inevitable. In fact, if you haven’t experienced channel conflict, your product/service probably doesn’t have adequate coverage. Conflict frequently occurs when there’s a power shift in the channel relationship. As new products grow, the manufacturer is in the driver’s seat demanding more of the channels. When growth begins to stall, the power shifts to the channels and they begin to place demands on the manufacturer. A good channel conflict manager knows how to maintain balance in the relationship and keep conflict healthy.
Our experience demonstrates channel conflict falls into three categories:
1. Supplier-driven conflict
2. Channel-driven conflict
3. Conflict caused by evolving markets
Supplier-Driven Conflict. As manufacturers strive to increase their market share (especially in mature markets), they frequently implement strategies that are ‘in conflict’ with the goals and strategies of existing channels. Examples include:
• Adding distribution in a geography
• Developing marketing programs designed to garner more attention from the existing distributor
• Developing marketing programs that create market pull to force channels to sell their product
• Focusing on the needs of their customers at the expense of the needs of their channels
QDI consultants worked with a major janitorial supply manufacturer (Company X) to develop a strategy to significantly grow its business. In spite of launching new product lines and entering new product categories, sales growth had been flat for almost twenty years. Company X marketed through a single-form of distribution: janitorial supply distributors. The company generally had the very best distributors in each geographic market.
Over the years, distributors developed their own private label product lines and established expertise in specific customer segments. The distributors promoted their private label at the expense of Company X’s product line and had poor coverage in markets Company X wanted to grow.
Company X’s solution was painful. Expand distribution. Expand pull-through sales activities and develop product lines and pricing strategies to squeeze out the private label products. Naturally, distributors balked at all of these strategies. For a very painful year, sales management constantly dealt with angry distributors. The effort paid off. Finally, sales of Company X’s product began to grow again.
This case study demonstrates the danger of letting distributors take control of your business. Savvy channel conflict management reversed a destructive distributor relationship.
Channel-Driven Conflict. In many industries, channel consolidation disrupts traditional distribution patterns and market power ends up concentrated among fewer channel partners. This consolidation results in:
• Rationalization of the distribution strategy, often forcing a business to keep an alliance with one distributor over another
• Market power shifts to the channel. Instead of being a relationship of equals, the channel begins to dictate marketing strategy which impacts a business’s ability to control its own market destiny.
QDI helped a client in the power tool industry who was facing significant pressure from a major “big box.” Margins were being squeezed and the channel was beginning to dictate product-line strategy. Our client needed to minimize conflict with this powerful channel and increase control of their own product line and channel strategy. QDI conducted market research to determine the power tool company’s customer base, built multiple scenario models and evaluated alternative strategies.
The power tool manufacturer did not have consistent brand power and market share. They grew rapidly simply because they were pulled by the growth of their major big-box retailer. The retailer began to exercise its power over our client. The tool manufacturer no longer had the brand power to maintain its negotiating position.
As our client wrestled with the big box retailer, they were forced to make product line and pricing decisions that weakened their brand position in the market … essentially commoditizing a leading brand. Ultimately, the brand was significantly damaged opening the way for the big box retailer to replace it with a house brand.
QDI helped the tool manufacturer understand they had lost their position in their channels because of a weakened brand. Armed with this knowledge, the power tool company implemented strategies to strengthen their brand and ultimately found new channel positions.
Conflict Caused by Evolving Markets. Channel conflict managers must keep a watchful eye on evolving markets and quickly mitigate channel conflict. Changing customer needs drive the creation of new channel strategies.
The computer industry demonstrates how channels evolve to meet changing customer needs. Prior to the PC, computers were sold by a direct sales force that provided hardware and sophisticated solutions. When the PC initially was launched, it was positioned in a “high value” sales channel – a channel that would educate and provide post-sales support to the end user. The technology and the market quickly changed. Users became smart enough to identify their own needs. The computer moved to channels that were more like discount stores – charging low prices and providing low levels of support.
The next phase of the evolution was the Dell revolution. Michael Dell found a better more efficient way to meet the consumer’s needs. He built PCs to customer requirements and shipped directly to the end user bypassing traditional channels. Compaq tried to copy Dell’s model. But, unlike Dell, Compaq had a dealer network. Its move to go direct, angered retailers and created channel conflict. When dealers get mad, they look for other products to sell.
Now the computer industry has moved to the internet. Customers configure systems, price compare and place orders on line. On-line channel relationships threaten the traditional channel partners.
It’s critical to understand channel dynamics. QDI consultants take an in-depth look at buyer behavior and brand perception among customers and channels across multiple market segments and buying scenarios. Our findings help manufacturers identify where to build and exercise market power to grow revenue and profits. When channel conflict is managed properly, the supplier maintains a higher degree of control, the customer receives increased levels of satisfaction and the channel is rewarded for its efforts. To be an industry leader, businesses must successfully manage channel conflict.
