Power in channels
Category: Marketing
Complex channels with intermediaries or numerous service points give rise to the need to organize and co-ordinate activities. If it is not a vertically integrated channel under the control of one organization then ways have to be found to obtain the co-operation of independent organizations. Because these organizations will have their own motives for engaging in the channel Brown suggests:
«The relationships therefore tend to exist in a condition of co-operation or conflict as one or other attempts to dominate the network of relationships to achieve their own goals. The ability to dominate is attributed to the possession of power…»
The importance of power in channel relationships is recognized by Sturdivant and Granbois when they say:
«The literature clearly suggests therefore that power is a major determinant of channel member behavior. Through power firms attempt to influence the behavior of their co operating and yet essentially egocentric fellow charnel members.»
Financial standing and market position are important bases of power. Financial strength gives the apparent ability to hold out in bargaining situations and for any single bargain to be perceived as of little significance. Market position is based ultimately upon consumer loyalty. The relative position of manufacturers’ vis-a-vis retailers’ own labels will be a case in point. Where the manufacturer’s brand attracts strong consumer preference then all suitable retailers will wish to stock that brand giving bargaining strength to the manufacturer. In the face of consumer indifference between brands the retailer will have more bargaining strength. Where the retailer’s own brand is preferred the retailer can totally dominate the channel and every aspect of its operation.
Stern and El Ansarv have comprehensively reviewed power bases in marketing channels and list the following:
Rewards — reward power is based on the belief by B that A can offer him a reward, e.g. granting wider margins.
Coercion — coercive power stems from B’s acceptance that A could potentially punish him, e.g. by withdrawal of exclusive distribution rights.
Expertness — B may perceive A to be expert, e.g. A may offer B special promotional services or technical advice.
Identification — B may wish to be identified with A; e.g. he believes that A is prestigious and that he will benefit from that association.
Legitimacy — although no formal authority relationship exists some channel members may consider the largest firm to be the channel leader and effectively may allow him authority over some of their activities.
Channel members’ perceptions of their own role and those of other members can cause conflict Channel conflict can be defined as:
«A situation in which one channel member perceives another channel member to be engaged in behavior that is preventing or impeding it from achieving its goals.»
Examples of channel conflict include the following:
e.g. Middlemen want exclusive distribution manufacturer wants intensive distribution.
e.g. Manufacturers trying to by pass some retailers and deal direct with customers.
e.g. Wholesalers not carrying adequate stock.
e.g. Lack of required promotional effort by intermediaries on behalf of the manufacturer.
e.g. Poor delivery punctuality by a transport intermediary.
It is in the resolution of such channel conflicts that the channel power bases (previously described) are important.
Corey (1985) examines some useful examples of striking the balance of power in industrial distribution systems and thus preventing debilitating conflict. Corey comments:
«The more a distributor can get his customers to standardize, the larger the percentage of his supplier’s business he represents, the greater his geographical coverage, clearly the more bargaining power he has. On the other side, the more the manufacturer represents of any one distributor’s total gross margin dollars, the more its products are differentiated, have high brand identity and require highly technical selling, the more active it is in creating user demand, then the greater the power of the manufacturer. Another factor is the use of multiple, competing channels systems as opposed to exclusive representation in each geographic market area. To be completely dependent on one distributor in a market area is to allow that distributor to control the user accounts in the area and the volume of business they represent as a bargaining lever.»
An interesting example of channel conflict based upon the question of pricing policy is provided by the Office of Fair Trading (1989). This involved the use of Black and Decker portable power tools as loss leaders by certain channel members, and is explained in the figure below:
Distribution of portable power tools: Conflict and channel power issues
Black & Decker (BD) has dominated this market and has been the undoubted channel manager. Fundamental restructuring of the intermediaries brought that into question and a focus for channel conflict has been the issue of loss leaders. Some characteristics of this market and BD’s strategies are noted below.
In 1988 UK DIY power tool sales were Ј103m of which 45 per cent were drills, 12 per cent jigsaws and 10 per cent sanders
Market share
| 1984 | 1988 | |
| BD | 79% | 66% |
| Bosch | 10% | 20% |
| Hitachi | 1% | 2% |
| Makita | 2% | 3% |
The competitive structure can be explained partly as being a result of the operation of significant barriers to entry. These are:
High rate of innovation, e.g. BD introduces at least ten new models annually.
Strong brand images.
Manufacturing scale economies.
Market entry has been easiest for manufacturers already established in another country.
Distribution
| % | |
| National DIY superstores | 39 |
| Independents | 32 |
| Mail order and catalogue showrooms | 22 |
| General retailers | 7 |
After-sales service
BD has 38 service stations and uses 500 independent stores as collection points. The sharp decline in the numbers of independents is a problem because multiples usually refuse to act as a collection point.
BD advertising and in store promotions strategy.
There are four elements:
Special added value packs containing free products such as accessories.
Each year four or five additional products not in the company catalogue are supplied to retailers to use in aggressive price promotions.
Financial support to retailers for in store and local promotions.
Ј1 25m in store display material supplied each year.
Pricing and discounts
Retailers take Argos as a benchmark because they are perceived as offering keen prices which are published in their catalogue. BD gives retailers 38 per cent off suggested retail price, plus a 2 per cent volume discount.
Loss leaders
This issue became the critical factor in the relationship between BD and a number of import ml retailers in the late 1980s. BD has had an express policy of not supplying retailers who they believe would use their products as loss leaders. The Resale prices Act 1976 provides for withholding supplies if there is «reasonable cause» to suppose a product will be used as a loss leader. In 1987-88 BD says there were nine instances when it withheld supplies. One of these involved Argos and followed complaints by other retailers about Argos retail prices.
BD is against loss leading because it wants to create wide distribution with good regional coverage and reasonable width and depth of their product range widely available. They believe loss leading reduces the number of retailers. It also causes others to reduce the extent of the BD range that they offer because margins in this market are not large. In 1988 eight multiples, including Woolworth, Tesco, Asda and Halfords, all cut back on their Bd ranges.
BD argues that its products are used as loss leaders because of their strong brand image and very high levels of customer awareness. Loss leading damages that image.
In 1988 B&Q asked the Office of Fair Trading (OFT) to investigate the distribution policies of BD. This was a consequence of the refusal by BD to supply B&Q, because BD thought that B&Q would use their products as loss leaders. In 1989 the OFT found that BD used a «going rate» as a suggested retail price and that this served to fix a floor to retail prices. The OFT believed this to be anti-competitive and therefore there was a case to answer and referred BD to the Monopolies and Mergers Commission.