Channel Conflict – Definition

Cite this article as:"Channel Conflict – Definition," in The Business Professor, updated September 14, 2019, last accessed June 2, 2020, https://thebusinessprofessor.com/lesson/channel-conflict-definition/.

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Channel Conflict Definition

Channel Conflicts, as the name implies, refers to a situation where a manufacturer bypasses all necessary parties in the chain of production and attends directly to the consumer. In this case, the wholesaler, retailer, and any other party which was initially involved in transferring the products from the manufacturer to the consumer are cut off from the negotiations by the producer. Here, the producer in question gets to sell their product directly to the consumer via different marketing techniques, usually through the internet.

A Little More on What are Channel Conflicts

Channel Conflicts are usually as a result of internet availability. Manufacturers tend to prefer capturing and marketing their products directly to their consumers without having to deal with the middlemen or other contributors to the distribution process. According to the U.S Department of Commerce’s Census Bureau, in 2005, online sales grew 24.6% from 2004 to attain a value of USD 86.3 billion. It also documented that retail sales for that year grew 7.2% from the previous year. This large growth was one of the determinants of manufacturers’ decisions to try to utilize the online space for marketing its products directly to consumers without destroying the channel relationships.

Research from Forrester and Gartner in 2007, showed that despite the increased growth of internet e-commerce, up to 90% of producers didn’t sell their products online. Out of this percentage, 66% claimed that channel conflict was the reason behind their drawback. Further research also showed that offline businesses (brick and mortar stores) had an 80% higher chance of keeping  a business model for up to three years than other businesses which operated in either of both channels.

The second most popular distribution channel is e-commerce due to the low associated expenses and communication costs. However, like everything with an advantage, there must exist a disadvantage. The low cost nature of communications in e-commerce allows consumers to talk to each other in the online marketplace, thus limiting how far one can set his own price in the online market.

Another possible condition that can create channel of conflict is the presence of over production. When too much goods are produced, and less demand occurs, the market ends up with surplus supply. Also, the transition from the production of a new version of a product from an old one also affects channel conflicts. Other important cases will include change in market trends, distribution of damaged products, and possible misunderstandings between manufacturers and the primary middlemen. Company shares clearance sales come in handy in situations like this.

Also, it is common knowledge that producers and suppliers nowadays prefer having different selling options and thus, they utilize almost all available channels in putting their products out to the world for purchase. A typical company usually places the same products in its traditional shop on its online marketplace, as well as any other channel it utilizes. This can cause a channel conflict. Take for example a business which sells bluetooth headsets both in their traditional shops, their e-commerce sites and possibly through their affiliates. Basically, if this business owns 30 units of a particular model, let’s say the “X” model, and these units are uploaded on all their marketing channels, then a channel conflict tends to occur. This is because, if 20 units are bought from the traditional shop, then it’d just be 10 units remaining. However, if the manufacturer or the supplier fails to update his inventory, his online marketplaces and other channels will still give customers the  idea that there are 30 units of the product available from such supplier. Thus, if someone were to place an order of 15 units of bluetooth headset “X” model, the supplier will be short on stock by five units. This isn’t exactly good for the business. Simply put, we can say that the channel conflict in this case occurred because the manufacturer bypassed his normal model of selling products by putting the same goods in the quantity on different marketplaces.

Preventing a channel conflict is quite easy and doesn’t require technical knowledge. In a traditional business, avoiding a channel conflict is just as easy as making sure that the prices similar products in the shop and on the online marketplace resonate. This way, the business will have different sales channel which are easily accessible, and prevent any possible occurrence of confusion on the part of buyers.

There are different forms in which channel conflict occurs. Just like every other thing in the world, the consequences of ones actions can be soft or devastating. Also, the consequences can be great for the individual who took such an action, or in other cases, destroy his or her reputation. The same occurs with the producer in channel conflicts. The results from a channel conflict can do either of the following;

    • Have an ignorable consequence on the manufacturer
    • Bring benefits to the manufacturer, by helloing his surpass competitors
    • Destroy the producer’s business or marketing channel.

For the third to occur, an existing channel which serves a particular set of customers needs to be compromised by a new channel from the same producer. This can occur when a manufacturer uses an online marketplace to serve customers that is already being served by a wholesaler. Here, either the wholesaler has to stop selling his products, or simply try to compete with the manufacturer in an unfavorable fashion. Either way, the manufacturer suffers since in a sense, he is trying to compete against himself. This can lead to an elimination of middlemen activities between the producer and his potential customers in the market. Finance and Internet are the primary causes of disintermediation.

Finance

This refers to the severing of financial middlemen or intermediaries such as banks or brokers between a fund provider and a fund user. Simply put, it is like investing in a company without a broker (meeting up with the company directly), or taking a loan directly from a lender without having to go to a bank. The latter is more common as people can get direct loans from VCs, friends and investors without needing to sign any paperwork through third party.

Internet

This refers to the severing of any intermediary party between a giver and a receiver on online sources. Basically, this occurs between a seller and a buyer, and also between an informant and a reader.

Different Types of Channel Conflicts

Horizontal Conflicts

This is almost different from the typical channel conflicts we’ve discussed above. Here, the conflict occurs between two or more similar parties, serving under the producer or wholesaler. Let us assume that a wholesaler supplies goods to four different retailers based in counties “W,” “X,” “Y,” “Z.” Now if there is a major agreement between all parties to stick to their counties, a channel conflict can only occur when one retailer decides to sell products in another county. This will surely raise conflicts, and in a case where it cannot be solved, there is a possibility that all parties involved in supplying that product (from the manufacturer down to the retailers) will be affected. It is also possible that consumers might get affected if the products in those counties are only sold by these retailers.

Vertical Conflicts

Unlike the horizontal conflict, vertical conflicts occur between two members on a consecutive level, like a wholesaler and a retailer. Assume that a retailer gets products from a wholesaler for $30 each, and happens to sell them at $90 each to consumers. If consumers happen to get to know the actual cost of such a product, they might make a complaint to the manufacturer who in turn might phone the wholesaler. Thus, the wholesaler will have to question the retailer on such actions, especially if it is affecting the demand of such a good in the market.

Multichannel Conflicts

This generally refers to conflicts that affect different members of the supply circle without any particular order. Let us assume that a manufacturer happens to own two marketing channels; traditional and online. Now, he supplies products through the traditional channel at the cost of $40, and on the online marketplace at a price of $25. Now, merely looking at this, one can conclude that it’ll present issues for the retailer of such products. However, let us assume that the wholesaler happens to buy these products at $40 from the producer and aims to sell them at $43 each to the retailer. Since the retailer merely needs a sufficient enough amount of such products, one that is enough to attend to market demands, he decides to buy this product directly from the manufacturer through the online marketplace at $25 each. Now, if he decides to sell such products at $30 each to consumers, he’ll be able to get more sales compared to when he’s buying from the wholesaler, and less sales when he’s competing with the manufacturer. From this, we can see that this directly affects all three involved channels. Here, the retailer will lose more because consumers can make use of the online marketplace to get products for $5 less, while he’d save $18 compared to buying from the wholesaler. Either way, the wholesaler won’t be selling, because there is no retailer to buy at that price, and neither will the retailer be selling as much since there is a cheaper price available through another channel. Here, the manufacturer will have to either resolve the pricing issues, or decide to strike out the traditional sales method. It would be stupidity to choose the latter.

Final Thoughts

Channel conflicts doesn’t have a one-for-all solution, and thus, each solution should be modeled to fit the issue at hand. In a case where price is the issue, using a model meant to eliminate internal competition won’t be effective. Thus, the best way to solve channel conflicts is for management at all levels to come together to fins the best solutions to the issue at stake.

References for Channel Conflicts 

https://smallbusiness.chron.com/horizontal-vertical-marketing-conflicts-65325.html

http://www.businessdictionary.com/definition/channel-conflict.html

https://en.wikipedia.org/wiki/Channel_conflict

https://searchitchannel.techtarget.com/definition/channel-conflict

Academic Research for Channel Conflicts 

Interorganizational relations in marketing channels, Reve, T., & Stern, L. W. (1979). Academy of Management Review, 4(3), 405-416. This paper focuses on relationships in marketing channels. A little reference is provided in the exhaustive research done in the marketing subject addressing distribution channels interactions in many papers published in the journals of organizational behaviour. This paper aims to bring the related materials to the organizational behaviour and sociology fields that will definitely make inter-organizational relationships theories better.

The impact of channel function performance on buyer–seller relationships in marketing channels, Van Bruggen, G. H., Kacker, M., & Nieuwlaat, C. (2005). International Journal of Research in Marketing, 22(2), 141-158. This article investigates how the channel function performance of distributors influence their relations with organizational customers and how the interdependence framework of the relation leaves the effect of these actions on the quality of relations. The authors conduct a survey by collecting data from Belgium and the Netherlands informants. The findings are that the channel function performance level of a distributor is an important customer perceptions driver of relations quality. The interdependence framework of the customer-distributor pair or buyer-seller dyad moderates this relationship in terms of relative customer dependence and total interdependence.

Direct marketing, indirect profits: A strategic analysis of dual-channel supply-chain design, Chiang, W. Y. K., Chhajed, D., & Hess, J. D. (2003). The emergence of e-commerce enables several manufacturers to engage themselves in direct sales and redesign the conventional channel structures. This paper builds a game of price-setting between independent retailers and a manufacturer. Direct marketing promotes the profits flow indirectly with the help of retail channel and assist the manufacturer in making overall profitability better. The direct channel is not detrimental always to the retailer. This is because a wholesale price decline will accompany it. This manufacturer push and pull combination can be advantageous for the retailer in the state of equilibrium. Merely, the direct channel introduction threat can enhance the cooperative gains negotiated a share of the manufacturer.

Opportunities and challenges in multichannel marketing: An introduction to the special issue, Rangaswamy, A., & Van Bruggen, G. H. (2005). Journal of Interactive Marketing, 19(2), 5-11. Customers know how to use different interface technologies, including wireless devices and websites to make an interaction with the firms. Increasingly, they select the channels and the times by which they deal with the companies for multiple aspects of interactions. The authors refer to those who interact with firms by using more than one channel being multichannel customers and the marketing strategies to approach these customers referred to as multichannel marketing. As per research made by Doubleclick in 2004, the multichannel shopping incidence among online customers has risen up from 56 percent to 65 percent between the holiday season of 2002-2003.

Intrachannel Conflict and Use of Power., Etgar, M. (1978). Journal of Marketing Research (JMR), 15(2). This article provides suggestions on conclusions ‘drawn by Lusch that coercive power causes more intra-channel conflicts’ may not be correct. This is because his research did not take into consideration the dynamic prospects of conflict relations/power channels.

Managing marketing channel opportunism: the efficacy of alternative governance mechanisms, Brown, J. R., Dev, C. S., & Lee, D. J. (2000). Journal of Marketing, 64(2), 51-65. This paper evaluates 3 governance mechanisms on how well in marketing channels they minimize opportunism. The authors use the hotel industry of the United States and examine how ownership, investing in transaction-specific assets and relational exchange norms limit the opportunism. They also throw light on how several governance mechanisms combinations influence opportunistic attitude in hotel channels. The overall results, in general, support focusing on relational norms in opportunism management in marketing channels. The authors conclude that one can exacerbate the opportunism when one emphasizes investing in transaction-specific assets or ownership as governance policies.

Managing marketing channel multiplicity, Van Bruggen, G. H., Antia, K. D., Jap, S. D., Reinartz, W. J., & Pallas, F. (2010). Journal of Service Research, 13(3), 331-340. Advances in IT and changing customers requirements for channel service outputs significantly influence the routes to markets in several industries. This paper claims that these changes have caused highly important alterations in how customers make interaction with firms and as a result to a phenomenon called Channel Multiplicity. Customers’ dependence on different information sources from independent channel organizations and rising demand for consistent experience in the whole buying process characterize channel multiplicity. The authors specify the operating realities of new market driving channel multiplicity and overviews the consequences of channel management and design and also addresses issues created by the developments.

Negotiation strategies and the nature of channel relationships, Ganesan, S. (1993). Journal of marketing research, 183-203. This paper examines the effect of situational factors on the use of different negotiation strategies, for example, aggression in the relationship of the channel, PS (Problem Solving) and compromise. It investigates the effect of satisfaction and different strategies on channel member results. The author uses data from one hundred and twenty-four retail buyers in six chains of the regional departmental store. The findings are that when retailers are long-time oriented, the author uses passive and Problem Solving (PS) aggressive strategies to resolve conflicts on big problems which consequently provided greater satisfaction and higher outcomes as compared to aggressive strategies or compromise.

Modeling Conflict and Coordination in Multi-Channel Distribution Systems: A Review, Tsay, A. A., & Agrawal, N. (2004). In Handbook of quantitative supply chain analysis (pp. 557-606). Springer, Boston, MA. Any company which has to sell its products considers it important to make it available to the customers easily. This is not less than a strategic problem as the product development itself is. The internet is playing a vital role in the procurement activity of business and consumer. Its expansion has given new opportunities to customers for access. Material and information handling tech have widened the feasible sales set and distribution activities which a producer is able to perform reasonably. The logistic networks, the shipping powerhouses 3rd party deploys, have transformed the material delivery economics, e.g. United Parcel and Federal Express Services.

Product marketing and channel management in electronic commerce, Subramaniam, C., Shaw, M. J., & Gardner, D. M. (2000). Information Systems Frontiers, 1(4), 363-378. This paper is based on suggestions that the use of virtual communities, web marketing and virtual storefronts open the door of innovative opportunities for advertisers to understand the preferences of the consumers, make communication with them and personalize the advertising offers at quite lesser cost and more effectively as compared to traditional ways. Taking the unique features of the traditional channels and the web into consideration, the authors suggest using the market and product features in recognizing the right channel and the right product. They propose a new structure of channel management policies to assist the organizations in integrating the web channel effectively into the marketing policy.

Multi-channel strategy in business-to-business markets: Prospects and problems, Rosenbloom, B. (2007). Industrial marketing management, 36(1), 4-9. The multichannel advertising strategy is the main force in (Business-to-Business) B2B distribution channels, specifically since the online channels option has emerged a few years ago. Ensuring the availability of services and products to business markets through a large number of multiple channels may provide enhanced levels of service and customer choice. But integration and cooperation of several channels which operate at high-efficiency levels   compelled the managers to be responsible for managing the channel and cope with a number of challenging problems. It includes the e-commerce role in the multichannel framework, finding the best channel mix, constructing strategic alliances creating synergies and sustainable competitive gains.

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