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Success Strategies in Channel Management

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Presentation on theme: "Success Strategies in Channel Management"— Presentation transcript:

1 Success Strategies in Channel Management
Channel Power: Getting It, Using It, Keeping It

2 Power in Channel Implementation
Channel Power Power in Channel Implementation Power Defined Why Marketing Channels Require Power Influence Strategies How to Frame an Influence Attempt Power as the Opposite of Dependence Measuring Dependence The Balance Of Power Imbalanced Dependence Sources of Power

3 Channel Power In marketing channels, getting power, using it correctly, and keeping it are subjects of paramount importance. Virtually every element of marketing channels is permeated by considerations of power. These channels are systems made up of players who depend on each other. Interdependence must be managed, and power is the way to do it. The organizations who are players in a marketing channel must acquire power and use it wisely, first for the channel to work together to generate value, and second for each player to claim its fair share of that value. How the players gain and use their power today drives whether they can keep it tomorrow. Many different sources and uses of power exist: They are not equivalent.

4 Power in Channel Implementation
Channel members must implement the optimal channel design and indeed must continue to implement an optimal design through time. The value of doing so might seem to be self-evident, but it is important to remember that a channel is made up of multiple interdependent entities (companies, agents, individuals). But they may or may not all have the same incentives to implement the optimal channel design. Incompatible incentives among channel members would not be a problem if they were not dependent upon each other.. How, then, can a channel captain implement the optimal channel design, in the face of interdependence among channel partners, not all of whom have the incentive to cooperate in the performance of their designated channel flows? The answer lies in the possession and use of channel power. Incompatible incentives among channel members would not be a problem if they were not dependent upon each other. But by the very nature of the distribution channel structure and design, specific channel members are likely to specialize in particular activities and flows in the channel. If all channel members do not perform appropriately, the entire channel effort suffers.

5 Power Defined Power is the ability of one channel member (A) to get another channel member (B) to do something it otherwise would not have done. Simply put, power is a potential for influence. Exercising power means exerting influence. Is Power Good or Bad? Because power is the potential for influence, great benefits can be achieved by the judicious use of power to drive a channel to operate in a coordinated way. Like a hammer, power is a tool. A tool is neutral. We can judge how someone uses the tool, but then we are deciding whether the usage is good or bad. Power is merely an implement. It is value neutral Power is an emotionally charged term. It is laden with negative connotations: abuse, oppression, exploitation, inequity, brutality.

6 Why Marketing Channels Require Power
Marketing channel members must work with each other to serve end-users. But this interdependence does not mean that what is good for one is good for all. Each channel member is seeking its own profit. Maximizing the system's profits is not the same as maximizing each member's profits. Left alone, most channel members will not fully cooperate to achieve some system-level goal. Enter power, as a way for one player to convince another player to change what it is inclined to do. All else constant, each member of the system is better off to the extent that it can avoid costs (or push them onto someone else), while garnering revenues (perhaps by taking them from someone else). And one party's cost may generate disproportionate benefit to another party.

7 Power as the Opposite of Dependence
Specifying Dependence But what is dependence? B depends more heavily on A: Dependence is the utility provided, multiplied by the scarcity of alternatives. Both elements are essential for dependence to occur Channel members often consider themselves powerful because they deliver value to their counterparts. But their counterparts don't need them if they are easy to replace, and this reduces their power. It's easy to overestimate one's own scarcity. For example, distributors of maintenance, repair, and operating supplies (MRO items) systematically overestimate how readily their customers would shift orders away from them. The greater the utility (value, benefits, satisfaction) B gets from A and The fewer alternative sources of that utility B can find Thinking of my power as your dependence is useful because it focuses the analyst on scarcity, which is the question of how readily B can replace A. This point is easy to overlook.

8 Measuring Dependence How can you form a reasonable estimate of how much a channel member depends on you? A direct method is to assess both utility and scarcity separately and then combine them. To assess utility, you could tally up the benefits you offer. It is then important to understand the channel partner's goals and how its organization values what you provide. Or you might estimate roughly the profits you generate, directly and indirectly, as a summary indicator of the benefits you offer. Because you want to assess the worth it attaches to what you provide, focus on what is important to it (it may be volume rather than profits, for example). To assess how easily you could be replaced, consider two factors. First, who could be or become your competitors? What other organizations exist or might enter the market that could supply what you provide, or an acceptable equivalent? If there are none, you can stop here. But if there are alternatives, a second question arises: How easily can the channel member switch from your organization to one of these competitors? If switching is easy, your power is nil (in which case, it doesn't matter if you mis-estimated the utility you offer!). But switching away from your organization may be impractical or prohibitively expensive. In this case, you are scarce (even though alternatives to you do exist on paper). If you provide benefits, the other side needs you, and this makes you powerful.

9 Sources of Power Power (the potential for influence) is an ability, and abilities are not easy to assess. How do you take inventory of the extent of an organization's ability to change the behaviour of another organization? Five power sources: rewards, coercion, expertise, legitimacy, and reference." Reward Power A reward is a benefit (or return) given in recompense to a channel member for altering its behaviour. In distribution channels, there is, of course, great emphasis on the financial aspect of rewards. Reward power is based on the belief held by B that A has the ability to grant rewards to B. Of course, the ability to grant rewards is not enough: B must also perceive that A will grant rewards. Financial returns need not always be immediate, nor precisely estimable, but the expectations of eventual payoffs, even indirectly, do pervade channel negotiations. The effective use of reward power rests on A's possession of some resource that B values and believes it can obtain by conforming to A's request.

10 Coercive Power Coercive power stems from B's expectation of punishment by A if B fails to conform to as influence attempt. Coercion involves any negative sanction or punishment of which a firm is perceived to be capable. Examples are reductions in margins, the withdrawal of rewards previously granted (e.g., an exclusive territorial right), and the slowing down of shipments. Coercion is synonymous with the potential to threaten the other organization, implicitly and explicitly. Coercive power is the reverse of reward power. Technically, it can be considered negative reward power - a reward that is withheld, that doesn't materialize. Why treat it as a separate category? Why not consider "negative rewards" as being just a step below giving a low level of rewards?

11 Expert Power Expert power is based on the target's perception that the influencer has special knowledge, useful expertise that the target doesn't possess. Using expert power is not as easy as it may sound, even for an organization that holds considerable knowledge that would be useful to the channel. There are three difficulties: To be able to exercise expert power, a channel member must be trusted. Other-wise, others perceive the expert advice as an attempt at manipulation and discount it. Experts are usually accorded very high status; therefore, it is difficult to identify with them. This impedes building the necessary trust. Independent-minded, entrepreneurial businesspeople don't like to be told what to do. They believe that they are the experts, and are often right!

12 Legitimate Power Solidarity. Role integrity. Mutuality..
To be legitimate is to be seen as right and proper, as being in accordance with what is seen as normal or established standards. Legitimate power stems from the target company's sense that it is in some way obligated to comply with the requests of the influencer: The target thinks compliance is right and proper by normal or established standards. Thus, the influencer has legitimate power whenever the target feels a sense of duty, of being bound to carry out the influencer's request. Legal legitimate power is conferred by governments, coming from the nation's law of contracts and the laws of commerce. For example, in many countries, patent and trademark laws give owners a certain amount of freedom and justification in supervising the distribution of their value offers. Norms of behaviour arise in a channel, norms that define roles and effectively confer legitimate power on certain channel members. Norms - expectations of "normal" behaviour - exist not only within industries but also within certain channels, some of which manage to build such norms as: Solidarity. Role integrity. Mutuality.. The key feature of legitimate power is that the decision makers feel constrained morally, socially, or legally to go along with the influencer. This sense of responsibility or duty comes from two sources: the law (legal legitimate power) and norms or values (traditional legitimate power). Solidarity. Each side expects the other to focus on the relationship on the whole, rather than thinking transaction by transaction. Role integrity. Each side expects the other to perform complex roles that not only cover individual transactions but also cover a multitude of issues not related to any single transaction. Mutuality. Each side expects the other to divide up its joint returns in a way that assures adequate returns to each side.

13 Referent Power Referent power exists when B views A as a standard of reference and therefore wishes to identify publicly with A. Between individuals, there are many personal, psychological reasons why person B would feel a oneness with person A and would wish to be associated (identified) with A. In a marketing channel, a prominent reason why one organization would want to be publicly identified with another is prestige. Down-stream channel members would like to carry high-status brands to benefit their own image. pstream channel members "rent the reputation" of prestigious downstream firms."

14 Separating the Power Sources
The Balance Of Power High mutual dependence is synonymous with high mutual power. This situation gives channel members the ability to create very high levels of value added. Each party has leverage over the other. This can be used to drive coordination, to enhance cooperation. High mutual dependence is conducive to creating and maintaining strategic channel alliances. A second way that high and balanced (symmetric) dependence encourages cooperation is by blocking exploitation. There is no weaker party in the relationship: Symmetric dependence pro-motes bilateral functioning by increasing each side's willingness to adapt in dealing with the other. It is so difficult to categorize the five sources of power neatly (without being arbitrary) that many users of the framework don't even try. They mainly rely on three broader groupings. One method is to separate out coercive power and lump all the others together into non-coercive power. Both are giants. Each can force the other to share gains equitably. This fosters norms of fairness and solidarity, which makes coordination easier to achieve.

15 Imbalanced Dependence: Is Exploitation Inevitable?
What happens when channel member A is much more dependent than channel member B? The balance of power favours B when A is open to exploitation. All too often, that potential is realized. The more dependent party suffers, in economic terms as well as in the non-economic benefits it draws. This occurs even when the more powerful, less dependent channel member is not attempting to appropriate the rewards due to A. Of course, the spectre of exploitation is always present. The weaker, more dependent party often feels its vulnerability and is quick to suspect the stronger party of bad faith. Asymmetric relationships lead to more conflicting, less trusting, and less committed than relations of interdependence. What can channel members do when they are drawn into imbalanced relationships and find themselves the weaker party?

16 Imbalanced Dependence: Countermeasures for the Weaker Party
The weaker party can take three countermeasures. These three routes are: Developing alternatives to A Organizing a coalition to attack A Exiting the situation, removing itself from danger by no longer seeking the benefits A provides Many channel members deliberately keep a diversified portfolio of counterparts to allow them to react immediately if any one organization exploits the imbalance of power. Diversification reduces the risk of being exploited. Another countermeasure for B is to organize a coalition to counter A's power. More generally, this strategy brings in third parties. When B is dependent on A, but A is not dependent on B, then B can cope with its hazardous situation by reducing its dependence on A. There are a number of ways to do this. A common method in Europe is to write contracts calling for mandatory arbitration of disputes. Arbitrators are usually private, but the third party could also be a government body.

17 Tolerating Imbalanced Dependence: The Most Common Scenario
The most common reaction to being the weaker party in an imbalanced relationship is no reaction. More often than not, the more dependent party accepts the situation and tries to make the best of it. What happens next? Are stronger parties always exploitative? Do weaker parties always suffer? Should imbalanced relationships be avoided at any cost? The channel can function very effectively when the stronger party is careful to treat the more vulnerable one equitably. It then improves the quality of the relationship, hence, the functioning of the channel. Further, every channel member has a reputation at stake. Unfair treatment of one channel member reduces that reputation, making it difficult to attract, retain, and motivate other channel members in the future. Equitable treatment comes in two forms. One form of fairness is distributive justice, which refers to how the rewards of the relationship are divided up among the channel members. Imbalanced dependence is not always detrimental. It can work well, particularly in stable environments, which do not put much strain on the channel. In general, imbalanced power relationships work well when the less dependent party voluntarily refrains from abusing its position of power.

18 Influence Strategies Promise strategy. If you do what we wish, we will reward you. Threat strategy. If you don't do what we wish, we will punish you. Legalistic strategy. You should do what we wish, because in some way you agreed to do it. (The agreement could be a contract, or it could be the informal working understanding of how the parties do business.) Request strategy. Please do what we wish (no further specification). Information exchange strategy. Without mentioning what we wish, pursuing a general discussion about the most profitable way for the counterpart to run its business. Recommendation strategy. It is the same as information exchange, but states the conclusion this time. "You will be more profitable if you do what we wish." Information exchange strategy. Without mentioning what we wish, pursuing a general discussion about the most profitable way for the counterpart to run its business. This strategy is oblique. The objective is to change the counterpart's perceptions of what is effective in a way that favours the objectives of the influencer. It is a subtle form of persuasion: The counterpart is left to draw the conclusion as to what it should do. Recommendation strategy. It is the same as information exchange, but states the conclusion this time. "You will be more profitable if you do what we wish." Compared to information exchange, the recommendation strategy is more overt, making it more likely to generate scepticism and counterargument.

19 How to Frame an Influence Attempt
It is a truism that what you present is less important than how you frame it. Considerable evidence indicates that framing effects are powerful in channels. How should the influencer frame the message to the target? The valence of the frame is whether it is presented as a positive or a negative. Positive frame. If you do take on our new product, you will get substantial additional marketing support. Negative frame. If you don't take on our new product, you won't get substantial additional marketing support. Valence is a matter of sheer presentation. In contrast, a more substantial issue is whether to frame an influence attempt as contingent. A contingent appeal hinges on compliance: If you take on our new product, we will give you the distributor-of-the-year award. A non-contingent appeal is unilaterally bestowed whether compliance is forth-coming: "Congratulations, you've been named our distributor of the year! Oh, and we have a new product to propose to you.. ." The positive frame is more effective because the negative frame focuses the target on what sounds like a loss of something. Human beings feel threatened by losses; indeed, they dread loss more than they value gains. Negative framing makes decision makers feel pressured. It damages their satisfaction and trust and threatens their autonomy.

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