CHANNEL COORDINATION: AN ANALYSIS OF AGENT S ECONOMIC AND NONECONOMIC SATISFACTION

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1 Abstract CHANNEL COORDINATION: AN ANALYSIS OF AGENT S ECONOMIC AND NONECONOMIC SATISFACTION Cintia Retz Lucci University of São Paulo, School of Economics, Business and Accounting, PENSA Agribusiness Intelligence Center Av. Presidente Vargas, 2001 Sala 123 Zip code: Tel: (55 16) cinlucci@usp.br Everton Molina Campos University Barão de Mauá Ribeirão Preto University of São Paulo, School of Economics, Business and Accounting, PENSA Agribusiness Intelligence Center Av. Presidente Vargas, 2001 Sala 123 Zip code: Tel: (55 16) emcampos@usp.br Marcos Fava Neves University of São Paulo, School of Economics, Business and Accounting, PENSA Agribusiness Intelligence Center Av. Presidente Vargas, 2001 Sala 123 Zip code: Tel: (55 16) mfaneves@usp.br This paper focuses on the management along the channel distribution, using satisfaction as a tool. The authors Geyskens, Steenkamp and Kumar (1999) classified satisfaction into two types: economic and noneconomic. And the satisfaction of an agent may be based on both. But there is not a definitive or recommended proportion. Which one will be the most important or more visible by the agent? The motivation for this paper is that, once the most impacting factors for the distributors are understood, the supplier may focus their efforts in an efficient way to invest in the relationship with their distributors. An instrument of assessment (questionnaires) was applied to 130 dealers of agricultural inputs. In many cases, the noneconomic variables have presented a higher correlation than the economic one. As a general conclusion, the noneconomic variables are, at least, as important as the economic ones in the studied supplier-dealers relationship. Keywords: channel s management, supplier/dealer relationship, agricultural inputs 1. Introduction and goal The importance of the distribution channels is recognized and consolidated. Considered a strategic asset, fundamental to the producers, the management along the channel is, therefore, essential for the organization to achieve its goals (Coughlan et al, 2002). There are many ways to administrate the channel and satisfaction can be one of the tools. There are two types of satisfaction, economic and noneconomic type (Geyskens et al, 1999), and agent s satisfaction is based on both. However, which one will be the most important or more visible by the agent? This is the main problem of the research.

2 The present paper explores this question in the following scenario: a multinational supplier of agricultural inputs with distributors spread around all national territory. A questionnaire was applied for 122 of these distributors. An important difference among them is the fact that some display only the supplier's brand, while others also offer concurrent brands. This is an important factor to analyze levels of satisfaction and specify investments in the relationship. In a prior study with the same data base, but with a perspective of satisfaction versus conflict, it was observed that the level of channel satisfaction varies significantly according to the variation of conflict level (Castro et al, 2005). Our aim for this paper is to explore that once the suppliers understand the most impacting factors for the distributors, they will be able to focus they efforts efficiently to invest in the relationship with their distributors. Another theoretical support used in the analysis is the specificity of the current asset of the New Institutional Economic, more specifically, of the Transaction Cost Economics. The more specific the asset is, the higher the transaction cost that involves it will be. In the study there are two possibilities of specific investment in the relationship: exclusive dealers and training given by the suppliers to the distributors' employees. Specificity refers to how specific the investment is for the activity and what is the cost of its relocation to another use (Williamson, 1985). To the author, this is the most important dimension of the transaction and delimits many existing relationships amongst agents. 2. Research Framework The efficiency and success of many organizations may be strongly based on the distribution channels. This structure involves different agents and distinct organizations that, despite the convergence in the objective to offer a certain product, may have conflicting interests. A marketing channel or distribution channel is a set of interdependent organizations involved in the process of making a product or service available for use or consumption (Coughlan et al, 2002, p.20); and the members of the channel depend on each other to make their job (idem). The correct management of these agents is, therefore, a fundamental issue. Attending their purpose of providing products and services for the use or consumption and satisfying the final market users no matter if they are consumers or industry buyers a large amount of the channel structure make use of brokers that execute some kind of role on the products and service distribution. (Coughlan et al, 2002) On this way, Alderson (1954), Stern et al. (1996) e Coughlan et al (2002) emphasize the importance of channels that link specific activities which are connected to the functions of distribution and final users necessity serving, dividing these causes based on the demand and supply. Regarding the demand, (a) easy search, where brokers help to reduce the uncertainness on the process of distribution (market, transaction and necessity uncertainty) (Pelton, et al, 1997) and (b) and the divergence adjust of variety are pointed out. Regarding the supply (c) transaction routine creation, (d) reduction on the amount of influence and (e) easy transmission and information exchanging are pointed out. In summary, Coughlan et al. (2002) emphasizes that the brokers participate on channel effort, because they add value and help to reduce the channel costs. Monitoring, complex contracts, fines and penalties are some of the ways to make this management. However, another way is to invest in the relationship with each agent offering advantages - not necessarily financial ones that may stimulate them to act as expected. A relationship based on satisfaction can reduce these transaction costs and certainly is more agreeable than a relationship based in suspicions and inspections.

3 Consequently, the satisfaction may be one of the tools for channel coordination. Authors Geyskens, Steenkamp and Kumar (1999) classified satisfaction into two types, economic and noneconomic satisfaction. And the satisfaction of an agent may be based on both. But there is not a definitive or recommended proportion. There is a proportion between economic and noneconomic items in a scale of satisfaction that is variable (Geyskens et al, 1999). Another important point is the cycle that a relationship goes through (Dwyer et al, 1987); there are five phases: 1. awareness, 2. exploration, 3. expansion, 4. commitment, and dissolution. And in each one, distinct aspects are developed, such as honesty, trust and investment of the parties in the maintenance of the relationship. So it is important to identify in what phase the organization is, and then, to define which factors are important in the context. Specially on this case a firm with more than one hundred distributors the recognition of which phase each one is may help the firm to direct their efforts in a more punctual way by groups and therefore have the costs minimized. Aspects of noneconomic satisfaction such as honesty and trust are constructed during the exploration phase; "benevolence principles", in the expansion phase (Dwyer et al,1987; Rempel et al, apud Geyskens et al, 1999); the third phase is considered the most advanced one in the purchaser-salesman relationship, characterized by the investment of the parts to maintain the relationship (Dwyer et al; Geyskens et al, 1999). Another theoretical perspective, the New Institutional Economics, the transaction is the basic unit of analysis a contribution from John R. Commons (1934). The transaction has three dimensions, frequency, uncertainty and specificity (Williamson, 1985). According to Williamson (1990, p.12), the specificity is the key dimension of the transaction. Specificity refers to how specific the investment is for the activity and how costly is its relocation to another use (Williamson, 1985). It s about an analysis that emerges when one of the sides makes investments that have low or none value for alternative uses. The more specific the asset is, the higher will be the transaction cost that involves it. That is, the more specialized, exclusive a good or service is, and the higher it is the impossibility of finding a substitute without loss of value, the higher will be the prices/values involved. This characteristic is seen by the NEI authors as the most important transaction characteristic. The probability of having opportunistic actions increases, aiming, according to Neves (1999, p. 129), to gain rent appropriation. On this way once the assets are specific and hardly allocated for other relationships, the market relation guarantee against opportunistic attitudes of agents is not effective any more (John & Weitz apud Neves, 1999, p.129).thus specificity involves high risks. It has been verified that the relationship of the organization in matter with its re-sales involves specificities. It s the exclusive dealers and training given by the suppliers to the distributor s employees items. In theory its about an action that involves opportunism, and moral hazard risks, from the organization; risks of free rider regarding the multi-suppliers resales and that represents a costly investment with no alternative use. At least its expected that the re-sales discern in a positive way this actions from the organization. 3. Sample and operationalization The object of analysis is the supplier/dealer relationship. The instrument of assessment (questionnaires) was applied to 130 dealers of agricultural inputs, 109 of which were used for analysis processing. The application of the questionnaire occurred during an event of the supplier's firm.

4 The questionnaire, composed of open and close questions and nominal and interval scale, aimed at three objectives: analyze the conflict/satisfaction relationship (Coughlan et al., 2002; Rosembloom, 1999), the dedication of the industry/satisfaction of the channel relationship and the economic and noneconomic satisfaction with the supplier relationship. The operation remained as follows: satisfaction in the relationship with the supplier, level of aspiration of specific investment in the channel and finally the identified level of conflict. Accordingly, three questions directed this paper: 1.Which represents the biggest fraction within the concept of satisfaction, the economic or the noneconomic? 2. Is there a difference in the degree of satisfaction in the fraction (economic and noneconomic) between exclusive and nonexclusive dealers? 3. The investment in specific actions of the suppliers reflects the satisfaction of the channel's agent? For the first question, a correlation test will be made to test the correlation between general satisfaction and noneconomic satisfaction. After that, it will be tested if there is a correlation between general satisfaction and economic satisfaction. To answer the second question, the results obtained in the first one (general satisfaction, economic and noneconomic satisfaction) will be divided into exclusive and nonexclusive dealers. This division intends to analyze the question of the specificity of the dealers who only sells the supplier s product, comparing the levels of the dealers` satisfaction without exclusiveness. The raised hypothesis is that the dealers without exclusiveness present a greater degree of satisfaction if compared with the exclusive ones (since these ones have greater dependence degree and therefore, greater sensitivity for conflicts; and considering the preliminary results that satisfaction varies inversely with the conflict degree (Castro and al, 2005)). In the third question, an analysis was carried out to verify if the investments from the supplier on specific actions, in this case concerning the performance of the regional supervisor of sales, reflects on the satisfaction of the channel. These results will make the construction of hypotheses for future studies possible. The variables used for the subject "economic satisfaction" were 1. return to the commercialization of the suppliers` products, 2. profit versus allocated effort. For the subject noneconomic satisfaction, 1. motivation and nice atmosphere and 2. exchange of information with the supplier (Coughlan et al., 2002; Rosembloom, 1999; Neves, 1999; Castro et al, 2003). After been tabulated, the data had passed for an analysis showing a correlation (Anderson et al., 2003) between the factors using the software of statistics analysis SPSS. 5. Analysis and results The analysis was made firstly using only the financial aspects (return to commercialization and profit) and then, the nonfinancial ones (motivation and exchange of information). Table 1 - Correlation between dealer s general satisfaction with return to commercialization and profit due to sales effort (Economic variables).

5 General Satisfaction Return_comerc. Profit General satisfaction Person Correlation 1,223*,179 Sig. (2-tailed),020,063 Return of comercialization Person Correlation,223* 1,601** Sig. (2-tailed),020,000 Profit Person Correlation,179,601** 1 Sig. (2-tailed),063,000 *. Correlation is significant at the 0.05 level (2-talide). The results show that there is a correlation between general satisfaction of the dealer with the supplier for an analysis of significance of 5% with the economic variable return to commercialization. The same does not occur with the variable profit due to sales effort. Table 2 - Correlation between dealer s general satisfaction with motivation and exchange of information (Noneconomic variables). General Satisfaction Motivation Exchange information Satisfaction Person Correlation 1,467**,335** Motivation Person Correlation,467** 1,564** Exchange Information Person Correlation,335**,564** 1 The analysis of the data of the noneconomic variables had shown that the correlation to a level of significance of 1% is significant for the motivation and exchange of information with the supplier. In the analysis of the correlation between satisfaction with exclusive and nonexclusive dealers, we have the following results. Table 3 - Correlation between dealer s general satisfaction with return to commercialization due to profit from sales effort for exclusive dealers (Economic variables). Satisfaction Return Profit Satisfaction Person Correlation 1,524**,450** Exclusive dealer Sig. (2-tailed),000,001 N 50 Return of comercialization Person Correlation,524** 1,711** N Profit Person Correlation,450**,711** 1 Sig. (2-tailed),001,000 N The results had shown that the variables return to commercialization and profit due to sales effort were significant to an analysis of significance of 1%. Table 4 - Correlation between dealer s general satisfaction from motivation and exchange of information for exclusive dealers (Noneconomic variables).

6 Satisfaction Motivation Exchange Information Satisfaction Person Correlation 1,529**,443** Exclusive dealer Sig. (2-tailed),000,001 N 50 Motivation Person Correlation,529** 1,522** N Exchange Information Person Correlation,443*,522** 1 Sig. (2-tailed),001,000 N The analysis of the results showed that the variables motivation and exchange of information had been significant for the exclusive dealers to an analysis of significance of 1%. Table 5 - Correlation between dealer s general satisfaction from return to commercialization and profit due to sales effort for nonexclusive dealers (Economic variables). Satisfaction Return Profit Satisfaction Person Correlation 1,372**,084 Noneexclusive dealer Sig. (2-tailed),008,564 N Return of comercialization Person Correlation,372** 1,440** Sig. (2-tailed),008,002 N Profit Person Correlation,84,522** 1 Sig. (2-tailed),564,002 N The results had shown that the variable return to commercialization for the nonexclusive dealers was significant to an analysis of variance of 1%, while the variable profit due to sale effort was not significant, presenting a low correlation. Table 6 - Correlation between dealer s general satisfaction from motivation and exchange of information for nonexclusive dealers (Noneconomic variables). Satisfaction Motivation Exchange Information Satisfaction Person Correlation 1,574**,3** Noneexclusive dealer N Motivation Person Correlation,574** 1,714** Exchange Information Person Correlation,3**,714** 1 N The results of this correlation show that the noneconomic factors motivation and exchange of information for the nonexclusive dealers had been significant to an analysis of significance of 1%. In the analysis of the correlation return between dealer s general satisfaction and satisfaction from the sales regional supervisor of the supplier, we have the results presented in the table below.

7 Table 7 - Correlation between dealer s general satisfaction due satisfaction with the sales regional supervisor (Noneconomic variables). Satisfaction Regional Superv. Satisfaction Person Correlation 1,211* Sig. (2-tailed),017 N Regional Supervisor Person Correlation,211* 1 Sig. (2-tailed), *. Correlation is significant at the 0.05 level (2-tailed). The results show that the correlation between the general satisfaction of the dealer with the supplier and the satisfaction with the sales regional supervisor is significant to a significance analysis of 5%. 6. Conclusions and discussions Dwyer, Schurr e Oh (1987) have drowned the attention to look the buyer-seller exchange as an ongoing relationship and not as an isolate event. Nowadays, it is a usual vision that embraces all kind of relationship in marketing research. In fact, it was the fundamental base of this paper. For the accomplishment of this article, three questions had been raised and after the analysis of the results the following conclusions were drawn: I. Which one represents the biggest fraction in the concept of satisfaction, the economic or the noneconomic one? After the analysis outcome, one may conclude that, based on the results of the correlation, it can be verified that the noneconomic variables present a higher correlation than the economic variable for a variation analysis of 1%, revealing, therefore, more important. However, if we do the same correlation to a variation analysis of 5%, we also have as significant the variable return to commercialization", and not only the variable "profit due to sales effort". II. Is there a difference in the degree of satisfaction in the fractions (economic and noneconomic) between exclusive and nonexclusive dealers? For exclusive dealers, the outcome analysis shows that there are no differences between the economic and noneconomic variables in an analysis of variation at 1%. For the nonexclusive dealer, it can be observed that only the economic variable profit due to sales effort" was not important, showing that there are differences in this variable to exclusive and nonexclusive dealers. III. Does the investment on specific actions of the supplier reflect on the agent satisfaction in the channel? The results show that the supplier's specific actions reflect in the channel agent's performance, because the result of the correlation between "dealer satisfaction with the supplier" and the "satisfaction with the sales regional supervisor", that acts directly with the dealer, is significant to a signification analysis of 5%.

8 Thus according to the theory, a positive discern of the specific actions related to resales was expected; it has been confirmed. For the same reason, it was expected that in general exclusive re-sales were satisfied with the organization. It has been confirmed regarding economics and no economics variables. The fact that there are exclusive re-sales may indicate that its about investments from both sides to keep the relationship as exposed in the Research Framework. This might mean that in these cases, specific actions don t represent such a high risk comparing to specific actions for new re-sales. Finally the long term relationships are considered wanted in case of involvement of specific assets/services (Williamson, 1985). Thus it s suggested that the organization identify the re-sales that are in this phase to manage the most specific services. It could be to enchant the re-sale in order to keep in the relationship or it could be because the risks in the associated to the specificity will be lower under this conditions. Concerning the proportion of the two components of satisfaction, the theory doesn t offer a recommended proportion. As a general conclusion of this study, the noneconomic variables are, at least, as important as the economic ones in the studied supplier-dealers relationship. As to specific action, these were shown to be quite perceptive by the dealers. These results proved the need to acquire a deeper knowledge of the variables that determine the dealer's satisfaction, not only as a way to direct investments and company's expenditures in an efficient way, according to one of the first suppositions of this research; but, also, because the results of the research show that if correct actions are taken, the effect on the satisfaction degree of dealers is optimized. Also, these results are evidence that including noneconomic variables in the relationship is more than a style of management, but an effective instrument of efficient management along the channel. The results presented on this paper are preliminary and will serve to structuralize the hypotheses for the second phase of analysis, which the main focus will be to search elements concerning the specificity of the asset and decisions of investment of the supplier in the distribution channels. References Alderson, W. Factors Govering the Development of Marketing Channels. In: CLEWETT, R. M. Marketing Channels in Manufactured Products. Homewood: Richard D. Irwin, p Anderson, D.R.; Sweeney, D.J.; Williams, T.A.; A estatística aplicada à administração. 2 ed.. São Paulo: Pioneira Thomson Learning, Castro, L.T.; Neves, M.F.; Consoli, M.A.; Campos, E.M.; Relacionamentos e conflitos em canais de distribuição. In press, CLADEA 2005 (Conselho Latinoamericano de Escolas de Administração), na cidade de Santiago, Chile. Castro, L.T.; Neves, M.F.; Scare, R.F.; Conflitos em Canais de Distribuição: O Caso dos Canais Múltiplos no Mercado de Insumos Agrícolas no Brasil. In Internacional Conferece on Agrifood Chain/Networks Economics and Management 2003, na cidade de Ribeirão Preto, Brasil. Coughlan, A.T; Anderson, E.; Stern, L.W.; El-Ansary, A.I. Canais de Marketing e Distribuição. 6.ed.. Porto Alegre: Bookman, Geyskens, I; Steenkamp, J.E.M.; Kumar, N. A meta-analysis of satisfaction in marketing channel relationships. Journal of Marketing Research. Chicago: Mai, Vol.36. p Neves, M.F. Um modelo para planejamento de canais de distribuição no setor de alimentos. Tese (Doutorado em Administração), Faculdade de Economia, Administração e Contabilidade, Universidade de São Paulo, São Paulo, 1999.

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