Channel Conflict Management: How To Manage Through It And Win - Management - United States (2024)

It may seem counter intuitive to discuss channel conflict in asoft economy. When most of our clients think about conflictmanagement, they assume they will need controls on the channeland/or a reduction in channel partners as the solution. And who canafford to do so in the soft economy?

In reality, managing conflict is an imperative in a soft market.Channels are more sensitive to conflict because of the perceivedimpact on their bottom line. Therefore, they are quick to act tomanage the conflict—which usually means less emphasis onthe guilty brand. Few manufacturers can afford the loss ineffective market coverage that this unilateral channel decision canresult in. Thus, the need for the manufacturer to proactivelyaddress the issue.

Channel Conflict in Brief

Multichannel systems are a way of life for manufacturers today.Whether you are managing a mix of direct and indirect channels or aspectrum of high-support to low-support resellers, the reality isthat channel conflict will be an ongoing issue in your marketplace.As the number of internet sites (potentially including your own)that offer your product for sale proliferates, this multi-channelstructure becomes more complex and the channel conflict potentialmore pervasive.

A limited amount of channel conflict is healthy. It indicatesthat you have adequate market coverage. However, once the balancebetween coverage and conflict is lost, destructive channel conflictcan quickly undermine your channel strategy, market position andproduct line profitability.

Conflict can show up in the market in a variety of ways. A pointof confusion for many manufacturers is whether problems are trulysymptoms of destructive channel conflict or other marketing orchannel strategy issues. When faced with potential indicators ofdestructive conflict, you should audit your market position toidentify the true cause and then quickly act to address it.

Channel conflict is managed by a combination of economics andcontrols. Economic solutions compensate channels fairly forfunctions performed and help direct channels away from actions thatcreate destructive conflict. Controls put structure around achannel strategy to limit the potential for undue destructiveconflict.

What is Channel Conflict?

Channel conflict can be defined as any scenario where twodifferent channels compete for the same sale with the same brand.Conflict can take the form of a direct sales force competing withan independent distributor, two different types of competingdistributors, two like distributors competing for the same sale, orall of the above.

A few facts about achieving an appropriate balance betweencoverage and conflict:

• Lack of any channel conflict in a marketing strategy usuallyindicates gaps in market coverage
• Conflict cannot be eliminated. The goal of marketing managementmust be to optimize market coverage and manage a healthy level ofchannel conflict so that it does not become destructive
• Market share erosion and declining street prices are evidencethat channel conflict is becoming destructive. Channels areresponding to excessive competition by de-emphasizing the brand orby giving away too much in order to keep an account
• Every manufacturer will likely face destructive channelconflict at some point. As markets evolve and mature, manymanufacturers will be required to add new, lower-cost channels inorder to cover all major market segments. Often, destructiveconflict arises because changes in the manufacturer's go tomarket strategy lags the market changes associated with marketevolution.

Recognizing Destructive Channel Conflict

Channel "noise" regarding conflict always exists. (Infact, a lack of channel noise is often an early indicator ofcoverage gaps in the manufacturer's channel strategy.) However,it does not mean that your company is experiencing destructivechannel conflict just because different internal factions orchannel members are complaining about lack of manufacturercommitment or are uncomfortable with competition for somesales.

Increasing levels of noise or evidence of declining channelsupport for your product line would be indicators to pay attentionto. It is a tough call, however, since destructive conflict tendsto creep into a channel system over time.

External Indicators of Destructive ChannelConflict

Border Wars

These occur when multiple members of the channel network competefor the same sale in the same account. A limited number of borderwars should be expected and are, in fact, one indication that youhave good market coverage. A soft market creates the environmentfor increased border wars as channels get more aggressive todeliver revenue. Generally, channels will begin to react to channelconflict when incidence of border wars exceeds 10% to 20% of thatchannel's total business with a manufacturer'sproducts.

Emotion

A necessary component of good channel management strategy iscontrolling the degree of emotion from the channel. However, asemotion builds, the channels will begin to react by reducingsupport of the product line or by switching out that line whereverpossible. Emotion will often cause the channel to de-emphasize abrand even when it is not in the best interest of the channel. Wehave found that channels often have this discretion to controlbrand choice in as much as 40% of sales—they typicallydon't choose to exercise this discretion.

Customer Satisfaction

Conflict can erode customer satisfaction for two reasons:

• Customers will start to experience redundant buying costs whenforced to deal with multiple channels offering essentially the samesolutions in sales situations
• Competing channels focus on easy ways to win the sale in aconflict situation (such as dropping price) and begin to ignoreless evident customer buying requirements
  

Channel Conflict Solutions

Channel conflict is an integral part of your channel strategy,so you must examine your market position and channel strategybefore attempting to manage it. Taking a closer look at the problemoften reveals that the perceived channel conflict issue masks alarger channel strategy issue. So prior to executing solutions toaddress channel conflict, the manufacturer is encouraged to examineall elements of its overall channel strategy, including pricing,end user segmentation, channel support programs, company policies,etc. Have you created a conflict situation through the design orimplementation of these other components of channel strategy?

Destructive channel conflict is managed through economics andstructural controls. Economics motivate the channels to avoidconflict. Structural controls lay the ground rules within whichconflict is managed. With each tactic, communication beforeconflict arises is critical.

The right economic solution is dictated by the type of conflictbeing faced, the manufacturer's market and channel position,and the company's strategic goals. Economic approachesinclude;

• Dual compensation—applied when conflict existsbetween direct and indirect channels. The goal is to move theindirect channel from a position of potential adversary for thedirect sales force to one of "partner" for the directsales force
• Activity based compensation or discount—used tomanage cross-channel conflict or conflict between channels ofdiffering cost structures and capabilities. Activity baseddiscounts are applied by paying a channel a specific discount if itperforms a measurable task or function. These discounts allow the"high-cost" channel to compete against"low-cost" channels for those customers who value thehigh support
• Shared costs—the key difference between this conceptand functional discounts is that functional discounts compensatethe channel for incremental tasks via a discount on product sold,while shared costs pay directly for the task
• Compensation for market share—usually applied todirect versus indirect conflict, the direct sales rep iscompensated based on total market share in a territory. The goalsof the sales rep are based on direct and indirect volume, thusmotivating the direct rep to "partner" with indirectchannels to maximize territory volume

Structural controls are only as effective as their enforcement.There is no value unless you are willing to clearly spell out thecontrols at the outset of the channel agreement and enforce thestated penalties to all channel members. The structural controlsare typically applied to:

• Accounts—you specify "named" or"house" accounts where indirect channels can expect tocompete with your direct channels. Named accounts are usuallyspecified based on end-user sourcing capabilities, channel abilityto meet end-user buying requirements, and volume and strategicvalue
• Products—channels can qualify for franchising byproduct line/category across your company's offering. Productqualification is usually based on end-user product support needs,channel support capabilities, "fit" or positioning of theproduct category in the channel's overall business, andstrategic considerations
• Geography—as a manufacturer, you can specify thosegeographies/account types in which you will provide sales supportto the channel. These geographies are usually defined by grantingthe channel a primary area of responsibility

The successful marketer combines the elements of economic andcontrol-related solutions that best address conflict challenges—framing them in an understanding of market position,channel position, and strategic goals.

Is Channel Conflict a Strategic Issue in Your BusinessToday?

Take a moment to consider the following questions:

1. Have you recently seen your market move through a"transition" point (e.g., from introduction to growth,from growth to maturity)?
2. Have you made any recent changes to your channel strategy(e.g., adding channel members, adding new types of channels)?
3. Have requests from the direct sales force or channels forspecial prices increased significantly?
4. Have gross margins eroded significantly in any customer orchannel segments?
5. Have you seen a decrease in dollar revenue per direct sales repand/or dollar revenue per channel location?
6. Have you experienced significant loss of market share ordeclines in customer satisfaction in any customer segments?
7. Have you experienced a decrease in your number of channels as aresult of channels dropping your line?

If you answered yes to two or fewer questions, conflict is not astrategic issue for you today. If you answered yes to three or fourquestions, conflict could be impacting your business. Take thisopportunity to "audit" your market position and enactstrategies to manage destructive conflict. If you answered yes tofive or more questions, conflict might be undermining your channelstrategy and must be managed now.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.

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