Conflict Management of Distribution Channels Based on Shared Values

Conflict Management of Distribution Channels Based on Shared Values SONG Jicheng 1, 2 1. School of Economics, Wuhan University of Technology, Wuhan, P.R.China, 430070 2. School of Business, Inner Mongolia Finance and Economics College, Hohhot, Inner Mongolia, P.R.China, 010050 songjicheng@sohu.com Abstract: The conflict of channel is a kind of conflict between distributors and among manufacturers and members of distribution channels, which rise mainly from four factors including channels structural factors, communication factors, economic factors and channel design. What the faced problems between manufacturers and channel partners require to give up the previous channel design ideas of shared values, then understand and operate the relationship from the views of team-building, value-added chain, and shared values in order to apply channel integration, vendor alliances and capital penetration and so on, provide valuable service with communication, cooperation and win-win for channel partners, then set up a good relationship-based, collaborative model of channel relationship, thus improve the overall quality and efficiency of marketing channels and achieve win-win marketing strategy. Keywords: channel conflict, shared values, channel management 1. Theory creation and development of channel conflict Management theory of channel conflict stems the conflict research from western philosophy and sociology. Its results are adopted and developed to conflict theory of organizational behavior, which is used on marketing channel by scholars. The research results, according to western scholars from Stern(L.W.Stern), EI.Ansari(A.I.EI-Ansary),Bowersox(D.J.Bowersox),Cooper(M.B.Cooper),Waiters(C.G.Waiters),Sims(J. T.Sims),Foster(J.R.Foster) and Woodside(A.G.Woodside), show that channel conflict can be seen from two sides: one is resulting behavior for pillaging scarce resources or thinking the impeded objective realization from others channel partners. Another defines channel conflict as opposition of objectives and behavior, or competing behavior among channel partners. Synthesized considering these two points, channel conflict can be defined as a dissatisfied with the status each other among channel partners on objectives, philosophy and action. On this basis, scholars have studied the relationship between channel conflict and competition and cooperation, the types of channel conflict, the development process of channel conflict, and the dual impact of channel conflict on performance. The research basic view rises the mainly reasons of channel conflict. They are inconsistent with the objectives, non-complementary role, resources scarcity, recognizing differences, differences in expectations, failed consensus on decision-making and lack of communication and so on. In fact, channel conflict can be a negative impact, meanwhile a positive effect as well. On the one hand, the negative impacts result mainly in the low system performance, resource wasting because of non-shared channel resources and advantages, even the disintegration of channel system. On the other hand, the positive effects show mainly on keeping clear existed contradiction, improving the group competitiveness, and making innovation as possible as. In the 1980s, the rising supply chain management model as a new management approach provides a new perspective to resolve channel conflict. Supply chain management is the oversight of materials, information, and finances as they move in a process from supplier to manufacturer to wholesaler to retailer to consumer. Supply chain management involves coordinating and integrating these flows both within and among companies. It is said that the ultimate goal of any effective supply chain management system is to improve the speed and accuracy of related processes, maximize the net value added in order 3

to enhance the organization s operational efficiency and effectiveness by reducing inventory. The basic idea of supply chain management is no longer viewed in isolation from various experprises and departments, but rather to consider all relevant internal and external contact body as an organic link totally. At the same time, all participants in the supply chain should regard the final consumer requirements of product quality, cost and service as common performance targets to maximize the overall effectiveness. Moreover, it has an active management on added value, strengthen the business partner relationship in order to achieve changing from antagonistic relationship to close cooperation by carefully selected business partners and reducing the suppliers, then form, maintain and enhance core competitiveness by using other enterprises advantages or core competitiveness. As it, the theory began to see channel as a whole and consider and analyses systematically the conflict to find a solution and the path. In the theory, inter-firm partnerships is seen as a contractual relationship in a certain period of time with information sharing, risk-sharing and benefit-sharing between manufacturers and distributors or among distributors. To form this relationship is due to the demands of cost control, reduced inventory, membership communication and achieving the overall performance improvement and increasing in order to maintaining the greater competitive advantages. 2. The current status and causes of channel conflict in China 2.1 The current status of channel conflict in China At present, there are a variety of distribution channel conflict forms in China. Viewing from conflict main body, it includes two types: among the distributors and between manufacturers and distribution numbers. 2.1.1 The conflict among distributors This kind of conflict mainly manifests selling beyond agreed areas and cutthroat competition. Because of poor price management, imperfect incentive mechanism, a bottleneck in sales management, the funds shortage even market revenge and so on, dealers sales beyond agreed areas, which brings about vicious results. The great hazards will disrupt the manufacturer s market price system, and trigger distributors the lose confidence and enthusiasm in the products resulting in giving up them. In addition, the poor price system of product or brand will lose trust and attention from customers, and they have an enormous market crisis for manufacturers. Vicious price competition is a competing price cuts in order to scramble for customers or inventory-based pressure, especially those dealers whose benefits from annual sales rebate keep predatory sales in order to gain more rebate and operating income, thus vicious price competition rises. 2.1.2 The conflict between manufacturers and distribution members This kind of conflict firstly manifests the incompatible cost sharing. Some dealers with their channel advantages require manufacturers the cost sharing as much as possible, such as cargo loss compensation, promotion discount or allowance, opening business compensation, festival promotion cost compensation and so on. All increasing costs continuously enhance the manufacturer s marketing costs and operating risk. Therefore, if the contradictions cannot be deal with very well, it will result easily in interest conflict strongly. The second conflict form is due to deterioration of retailers in credit and deliberately refusing to pay. With the change of retailing, retailers have a growing discourse power, thus manufacturers have to keep relaxation of credit restrictions. But it is still a serious problem what deliberately refusing to pay increases business risk of manufacturers. The important reason for channel conflict is the decreased loyalty of distribution members and channel tensions. Manufacturers have to strengthen the incentive intensity of channel members to maintain their loyalty. It is no doubt that manufacturer marketing costs and channel costs will increase and incuse tensions easily, then put forward some channel conflict. 2.2 The cause of conflict on distribution channel The last decade (2000-2009), is the booming period of China's marketing economy, in which the scale of distribution channels has been expanding gradually. Especially the rapid rise and development of chain 4

stores has greatly challenged the conventional manufacturers` leading position, enabled the relationship between manufacturers, distributors and retailers become more subtle and complex and made the interests and conflict between manufacturers go more and more strong and prominent. 2.2.1 Channel structure All of them, such as different levels channel organization; different compositions channel members, poor communication and information distortion, result in mutual suspicion and misunderstanding, even conflict. In addition, the tasks that need to be completed require cooperation and coordination, which exists control and anti-control for resources, and combines with the crossing right, so it is inevitable to take conflict. 2.2.2 Channel communication There are a large majority of unfavorable factors for communication like selective attention, information distortion, information understanding and treatment, different communication skills and timeliness and so on, all leads to conflict. In particular, because of the low trust and loyalty, the conflict will be taken easily for bad communication. 2.2.3 Economic It cannot be avoided to not only threat others profits to some extent that the pursuit of maximizing economic benefits separately using all kinds of competitive strategies, additionally competitive incentives, but also trigger conflict. 2.2.4 Channel design Many manufacturers lack scientific planning in channel design, choosing distributors and channel maintenance and so forth. The conflict will be taken for arbitrary design and implement. As manufacturer s game, they always struggle for control and counter-control; thereby there are phenomenon such as "self-built channel by factories "and "business self-brand". For "self-built channels by manufacturers", channels fail to operate large-scale requirements of product, and at the same time, high operating costs, large resources into manpower and material, sales management, terminal management can never be sufficient to manufacturers in terms of another more harm than good. For "business self-brand", merchants hope to launch the brand to shake off the manufacturer for self-control. However, such means as after-sales service, changes in consumer demand and the manufacturers of anti-control made the "business self-brand" was only wishful thinking. The apparent cause of above-mentioned phenomena is the fierce end-market competition and changes in the regional market forma. However, its fundamental problem is due to an excessive focus on benefit-sharing and the neglect of benefit-sharing in designing of channels. As in channel designing and managing, manufacturers conduct benefit-sharing as a control means, such as discounts and rebates which promote channel members attached great importance to the short-term effect, chase short-term profit maximization at the expense of partnership long-term maintenance. They do not pay attention to product quality, brand maintenance, customer relationship management, customer satisfaction and other strategic issues, which results in distributor s lack of loyalty and low of credit problems. Many manufacturers often loss channel partners and even face "defection" and "mutiny" situation, while serious arrears, occupancy, misappropriation of money has become routine, and even tore up the treaty at random, get away with money have occurred from time to time, the deterioration of credit has become a prominent issue in the current channel of distribution network. 3. Solution for channel conflict based on shared values In fact, suppliers, manufacturers and distributors are all playing a dual role on marketing channel. That is pursuing their own interests taking into account the overall interests of value chain meanwhile, which takes complex relationship of competition and cooperation. This complex relationship doesn t take an individual competition in the market but results in the competition between the enterprise clusters and value chains. A business must create their own value chain efficiently for remaining competitiveness, which claims 5

strategic partnership not merely transaction relationship. From the perspective of cooperation, both of structure design and setting up and maintaining cooperation need to manage channel value chain. At present, cooperative management channel in China is still production enterprise-oriented. The problems that manufacturers and channel providers are facing require manufacturers to abandon the past designing ideas of benefit-sharing channel, understand the relationship between manufacturers and channel from the team-building, value chain, value-added, shared values and operational point of view. Under the guidance of the communication, collaboration and a win-win goal, manufacturers provide a valuable service and establish a good relationship-based, collaborative relationship for the channel. Thus improve the overall quality and efficiency of marketing channels, achieve win-win marketing strategies. 3.1 Integration and sharing resources to improve competitiveness totally In selecting and integrating channel members,manufacturers should take the brand control, consumer, customer satisfaction as the primary objective. Customer satisfaction is the basis to obtain market power, competitiveness, and channels control for enterprise. Customer satisfaction is a determinant to customer loyalty, which affects the degree of channel control. Therefore, from the beginning integration of channels should meet customer needs. From the perspective of target customers to evaluate the performance of the channel, to study weather the distribution channel, sales promotion, personal selling, and advertising services are operating reasonably and effectively for integration. On the basis of it, other measures, such as enhancing communication, sharing information, promoting trust and cooperation and membership system, can be used to establish and maintain a good relationship in order to decrease conflicts and even prevent and resolve them. 3.2 To constructure strategic alliance to improve channel value and integrate core competitiveness to form total competitive edges Strategic alliance is inevitable to win-win between manufacturer and distributor for developing relationships. The alliance is a kind of competition in the pursuit of cooperation in order to create maximum value for the stakeholders by synergetic mechanism. It does not only focus on each link of value chain, but also pay more attention to whole value chain by strategic cooperation. In fact, strategic alliance makes use of sales network of distributors to complish value creation, delivery and realization, which aimed at improving marketing efficiency, control capacity and market demands flexibly and effectively. The loose contract-based alliances focus more on coordination and understanding, flexibility and autonomy to compose and exert collective competitive advantages. 3.3 To achieve the maximizing interests of total value chain by capital penetration and integrating various advantages of channel sectors With the capital market develops and matures, the merger and reorganization among manufacturers will become more frequent. The mutual penetration of capital makes the cross-shareholdings between companies. The movement of competition and cooperation between companies is from simple to sophisticated, from the vicious confrontation to cooperation and win-win, so that manufacturers set up the real "mutual interdependence and common development" strategic and cooperative partnership. In short, the link between manufacturers and distributors is the key link in the value chain of distribution channels, and is the greatest potential value-added component. The value share of distribution channels should be based on a comparative advantage that collects from various members. From the start to meet customer needs, by channel integration, strategic alliances, capital penetration and other means to give full play to all members of the specialized skills, form new, stronger synergies to create maximum value and achieve win-win situation for manufacturers, distributors and customers. Author in brief and Contact information: Song jicheng(1968 ), male, Chifeng of Inner Mongolia, Associate professor of Inner Mongolia Finance and Economics College, Ph.D of Economics College of Wuhan University of Technology. 6

Research areas: Industrial economic and Marketing Telephone:13847157999 E-mail:songjicheng@sohu.com References [1]. Zhuang Guijun. Power, conflict and cooperation: the western channel behavior theory, [J], Journal of Beijing Institute of Business, 2000(1): 8-11(in Chinese) [2]. Yan Zigang, Zhao jixin. Supply chain management, [M], Machinery Industry Press, 2004(in Chinese) [3]. Cao Zhenjie. Discussion on the competitive diminishing of sales channel and its innovation, [J], Journal of Inner Mongolia Finance and Economics College, 2005(2):60-62(in Chinese) [4]. Zheng Ruihong. Dissension between manufacturer and distributor, [J], Jiangsu Review, 2005(5): 13-15(in Chinese) [5]. Hou Guisheng. Discussion on the management strategy of value-added value chain, [J], Journal of Guizhou University for Nationalities,2002(4):17-19(in Chinese) [6]. Li Yanqiu. Channel strategic alliance management based on value chain, [J], Business Times, 2007(13): 12(in Chinese) [7]. Xia Chunyu. Conflict and management of marketing channels, [J], Modern Economic Science, 2004(11): 6(in Chinese) 7