CHANNEL CONFLICT/HARMONY

Channel conflict refers to a situation in which business partners clash in some of their operations, such as distribution networks, in such a manner that it causes stress to the relationship, effectively turning them into both competitors and partners simultaneously. In the Internet-driven business world, channel conflict is a well-known phenomenon. As the online medium has forced separate players closer together, it has resulted in many of them stepping on each other's toes.

Also called disintermediation, channel conflict is a problem that many in the e-commerce world aggressively took on as a consequence of devising an online strategy. In the process, the chain of business relationships became scrambled and confusing. Drastically lower transaction costs and higher margins for merchants make Internet-based direct customer sales irresistible. While companies fret over alienating their resellers, they risk losing valuable time and market share to aggressive competitors that move to become online distribution fixtures. These simple economics lay at the heart of channel conflict. Forrester Research, a Cambridge, Massachusetts-based market research firm, found that 66 percent of the consumer goods manufacturers it surveyed listed channel conflict as the chief barrier to online sales. However, the fact of channel conflict appears to be inevitable as more companies set up shop online. Companies have thus begun turning to strategies that will enable them to manage channel conflict and eventually turn it into an advantage.

Along with the advent of e-commerce, many merchants moved their distribution outlets online to reach customers directly and save on transaction costs. This caused powerful distributor networks, which often enjoyed extremely valuable relationship with the merchants, to take offense at the abandonment of their businesses. For example, manufacturers who have established brand name recognition and loyalty may want to reap greater returns on their sales by bypassing retailers, with whom they may have built lasting relationships that contributed greatly to both parties' success. Meanwhile, distributors—perhaps the most endangered victims of disintermediation—are increasingly challenged to prove they add immediate value and justify their margins. According to InformationWeek, one method was for distributors to forego the assumption of ownership over inventory and instead charge manufacturers a transaction fee, while assuming order-management and other value-added duties. Meanwhile, a whole new crop of distributors rose up to encroach on the e-commerce distribution channels, marketing themselves as e-commerce services that handle logistics and other tasks specifically for dot-coms.

In old-fashioned, linear distribution networks, channel conflict would arise when manufacturers and distributors established sales and distribution channels to the same group of customers. The proliferation of the Internet greatly exacerbated this problem, as individual companies sought to derive greater value from their sales by going directly to customers. By the end of the 20th century, however, channel conflict included all the areas of tension in which partners in one area of business were competitors in other areas, using the same channels of operation. While partnerships in the early stages of business are good, particularly for companies trying to turn themselves into e-merchants, eventually the collaboration can give rise to channel conflict, as each partner pulls in the direction it finds most relevant and attempts to play those channels to its strengths. What makes channel conflict in e-commerce so potentially devastating is that the Internet allows for extremely comprehensive, often seamless cooperation between partners. Thus, the roots of channel conflict run that much deeper.

More important than what the firm values in these cases is what the customer values in each segment of business. If customers have come to appreciate, expect, and depend upon a certain type of service and presentation they received through an experienced retailer, a manufacturer may be shooting itself in the foot by trying to sell direct to customers over the Web. No matter how important the drive to establish an online presence and an Internet-based distribution scheme, the ultimate goal is to turn channel conflict into channel harmony.

Channel harmony creates a synergy out of the conflict. For example, an online store might seek to take advantage of the fact that it has a physical store-front, and vice versa. Separate manufacturers and retailers are learning to create symbiotic relationships that include the Web as a distribution channel. The trick is to establish creative frameworks in which both manufacturers and retailers can keep a hand in and enhance the overall efficiency and profitability of the process. Thus, distribution channels are moving away from traditional linear models and toward more collaborative agreements. Channel harmony refers to the complementary environment in which a customer's use of one channel has a ripple effect throughout the organization or partnership.

FURTHER READING:

Chen, Ben, and Lara Kass. "Avoid the Supply Chain Squeeze." e-Business Advisor. July, 2000.

Cohen, Andy. "When Channel Conflict is Good." Sales and Marketing Management. April, 2000.

Gilbert, Alorie, and Beth Bacheldor. "The Big Squeeze." InformationWeek. March 27, 2000.

Greenberg, Paul A. "Manufacturers Beset by E-Commerce 'Channel Conflict."' E-Commerce Times. January 7, 2000. Available from www.ecommercetimes.com.

Kador, John. "Love-Hate Business Relationships." Electronic Business. October, 2000.

La Monica, Martin. "Rutting an End to Channel Conflict." InfoWorld. January 22, 2001.

Zetlin, Minda. "Channel Conflicts." Computerworld. September 25, 2000.

SEE ALSO: Cannibalization; Channel Transparency; Disintermediation