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A Brief Review of Channel Governance

A Brief Review of Channel Governance. Distribution Channel Strategy L. P. Bucklin Spring 2000. Channel Governance. Definition: The use of hierarchical type controls to coordinate activities throughout the channel instead of market forces to provide superior end-user service

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A Brief Review of Channel Governance

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  1. A Brief Review of Channel Governance Distribution Channel Strategy L. P. Bucklin Spring 2000

  2. Channel Governance • Definition: The use of hierarchical type controls to coordinate activities throughout the channel instead of market forces • to provide superior end-user service • to motivate members to adhere to a common marketing plan • to limit conflict among channel members • Coordination requires the presence of power and its judicious use

  3. Payoff from Coordination • Insure effective service delivery • Obtain wide stocking, Reynolds Wrap • Insure similar products, service pattern across all EUI, Pizza Hut • Provide appropriate pre and post-sale services, Cummins, Caterpillar, Ford • Simplify end-user shopping costs, Ford • Insure image consistency • Standardized facilities, Pizza Hut • Greater efficiency, Ford, Kraft

  4. Governance Requires Power • Power: the ability one one channel member to influence the behavior of another • The degree of power depends heavily upon the relative dependence of the governed party • The greater the degree of control sought in a channel, the greater the need for a form of governance which will that power

  5. Channel Governance Modes • Spot channels -- control through open markets and short-term transactions • Administered channels -- control through rewards, expertise, and the power to punish • Contractual channels -- control by long term agreements and the power of the contract • Vertically integrated channels -- control by ownership and authority of a single firm

  6. Channel Governance Modes Market Based Controls Reynolds Wrap (Intensive distribution) Anasazi (Selective distribution) Cummins Engine (long term incentive) Pizza Hut (franchise contract) Kraft Food (integration) Adminis- tered Control Contractual Hierarchy Unilateral Governance Bilateral Governance Asymmetric Dependence Symmetric Dependence

  7. Channel Structure Tools Degree of Channel Closure--> Form of Channel Governance Intensive Distribution Selectivity by Reseller Type Selective Distribution by Market Area Administered Channel Exclusive Distribution Exclusive Distribution with Exclusive Dealing Franchised Distribution Contractual Channel <--Greater Power Source Wholly Owned Distributor SBU with own Narrow Line Resellers Functional Integration (Separate L&I* functions) Integrated Channel *CBs=competitive brands

  8. Governance Tools Degree of Channel Closure--> Form of Channel Governance Intensive Distribution Reynolds Selectivity by Reseller Type Anasazi, HP Selective Distribution by Market Area Ford Administered Channel Exclusive Distribution Cummins Exclusive Distribution w/ Exclusive Dealing Ford Franchised Distribution Pizza Hut Contractual Channel <--Greater Power Source Wholly Owned Distributor Kraft (USA) SBU with own Narrow Line Resellers Ingersoll Rand Functional Integration (Separate L&I* functions) Polaroid Integrated Channel *L&I=Logistic & Informational

  9. Market Structure & Dependence • The power of a national (supplier) brand • Reynolds, HP • The role of personal selling to the end-user • Anasazi • Number & strength of competitors • Reynolds, Anasazi • Relative reseller scale, breadth of product line, legal • Kraft, HP Printer, Ford, Cummins • Reseller horizontal organization • Pizza Hut

  10. Behavioral Tools • Employing reward and monetary incentives • Exclusivity: Cummins • Promotional programs: Reynolds • Employing coercion(threats): Cummins, Pizza Hut • Employing legitimate authority • Contract—Pizza Hut, Ford, Cummins • Integration (hierarchy)--Polaroid, Pizza Hut • Employing expertise: influence through skills, knowledge, social position. Caterpillar, Anasazi • Authority sharing: Pizza Hut,Caterpillar

  11. Trust--The Power Facilitator • Trust reflects another's belief that you will act in their individual or collective interest • Trust increases in importance as channel control becomes more important and the length of the relationship is extended • Trust is built upon prior actions, visibility of reputation, mutual understanding, fair dealings

  12. Governance by Integration • Desirability • Enhance ability to coordinate channel • Heavy sunk investments in channel partners • High potential for partner opportunism • Improve channel efficiency through routinization, reduction of sales costs • Problems encountered: • Integrated level faces intense competition • Major assortment discrepancy between levels • Units at each level operate at different scale • High monitoring costs • Loss of efficiency from bureaucracy, conflict

  13. The Irony of Power--Conflict • Use of power within a channel is intended to constrain the behavior of another party • Constraints which weaken or diminish the position of the other party lead to conflict • Conflict erodes coordination and the effectiveness of the channel • The potential for conflict increases as the degree of control, dependence increases

  14. Sources of Conflict • Changes in system power balance, environment • Unexpected changes in system policies, norms • Dependence not offset by perceived reward • Failure to achieve agreement on channel model • The level and fairness of profit distribution • The use of dual or multiple distribution channels • The extensive use of coercion to achieve control • The inability to achieve adequate profit return

  15. Conflict Management Techniques • Institutionalized methods • Use of third parties • Contract management • Control over management style • Incentive management • System component evaluation • Limitation of multiple channel types

  16. Bi-Lateral GovernanceHigh, Mutual Dependence • Mutual commitment to welfare of channel partner, build integration, minimize conflict • Creation of joint control systems: Pizza Hut, Caterpillar • Focus upon issues of mutual concern • Mechanisms enable all parties to participate in decisions • Procedures developed for resolving differences • Methods created for communication of needs, concerns • General norms for behavior established • Joint decision making systems: resistant to relationship changes required by new conditions

  17. Governance Requires • Appropriate choice of governance mode from: • Recognition of potential payoff from channel coordination • Market conditions underlying power positions • Channel information & logistical requirements • The selection of partners with similar goals • Application of appropriate degree of channel closure • Implementation of technologies appropriate to diminishing conflict among channel members

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