Link to the student activity: Channel Conflict Challenges
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Suggested Solutions/Teaching Approach
1 = How would approach/resolve each of the above situations?
There are three channel conflict scenarios presented in the activity, namely:
- Chemists (drug stores) and Supermarkets
- Insurance Companies
- Franchisee Conflict
Let’s review these in turn.
1 = Drug stores/supermarkets
There is no dispute that drug stores would be the primary distribution channel for pharmaceutical companies, and that needs to be the number one priority in terms of channel relationships.
A pharmaceutical company that offers numerous exclusive medicines that are still under patent, may have a greater level of protection and strength in the channel, but pharmaceutical companies generally compete in generic medicines as well. This means that they are effectively competing against other pharmaceutical company in the chain, especially at the retailer point.
Depending upon the country and its legislation, the drugstore/chemist staff may be in a position to recommend brands or persuade the customer to switch to a generic offering. This means that the drugstore/chemist, as the retailer dealing directly with the end-customer, has a substantial amount of power and influence.
However, supermarkets access a large number of customers, and allow for large number of vitamin sales. Let’s assume that we have a pharmaceutical manufacturer who has a broad product range of both medicines and of vitamins and is looking appease both channels and reduce any potential conflict. This is one of the more challenging aspects of channel conflict, as consumers would potentially see drugstores and supermarkets as alternative/substitute suppliers of the same products
We need to create some sort of win/win relationship. There are several ways we could potentially achieve this:
- Develop unique product lines for each channel = different varieties of vitamins, different packaging, different sizes
- Develop different point of sale materials
- Potentially develop new brands (with a multi-brand strategy), with different brands for different channels
- Produce a range of private label vitamins, under the supermarkets brand-name
- Work with price points and promotional incentives to compensate any perceived favoritism across the channels
2 = Insurance Companies
This example of channel conflict highlights the challenges of a market in transition. As suggested by the activity, that would be the point of time when all of an insurance company products was sold via agents and brokers. However, since the widespread adoption of the internet and the emergence of online insurance companies, there has been a substantial reduction in the percentage of products sold through traditional channels.
This is a good learning point for students, as insurance companies would need to reinvent their business model as the environment changed. Initially, their business model and operations were built around agents and brokers, but they had to evolve towards internet distribution, but without destroying their traditional channels in the medium-term. Always a fine balancing act.
If we assume that insurance companies were heading this way, then some of the actions they should have taken in the medium term – in the transition period – should have been:
- Develop new products for online distribution, that are unique to the products sold through traditional channels
- Transition their personal/individual insurance products for online sale, while keeping the more complex business insurance products exclusive to agents/brokers (which would generate high commissions anyway)
- Ensure consistency of pricing between the channels, as to not position agents/brokers as a more expensive channel (if possible, particularly considering new online low-price competitors)
- Develop a new brand for the online market
3 = Franchisee Conflict
Slightly varying prices will occur across franchise operations, particularly larger ones, as there will be differences in logistics, rental costs, staff costs and so on. However, in this activity, there is a substantial difference in pricing.
As we can see, the city-based franchisee rarely sells kids’ meals and have priced accordingly, as a form of demarketing. This level of price differential will have a negative effect on the image of the brand with some consumers and is best avoided. Therefore, it can be addressed in the following ways:
- Provide a price guide to all franchisees, recommending a range of price points
- Greater education of franchisees, regarding the importance of protecting the brand and how that benefits all players
- Allow some franchisees to have a limited product range (however, this will also impact the brand image and its perceived consistency as well)
- Provide a financial incentive to this particular franchisee, based on the likelihood that they would have more wastage for this product line, as it would rarely sell. This goes some way to compensating them for this product, and would make them less inclined to demarket it.
2 = How often, do you think, that channel conflict occurs in real business life?
Channel conflict will occur in large companies, as they are more likely to adopt a multi-channel approach. As the company grows, a strong growth path is to expand by market development, which is often supported by channel expansion.
The initial channel and its players may have the perception that they have helped support the company while was growing, and now feel less valued as the company brings on new channels and partners.
As we know, channel conflict occurs because of:
- competition between channels,
- perceived favoritism,
- actual favoritism of pricing and product lines, and
- stronger/weaker relationships in the different channels.
Managing channel conflict needs to be proactive and strong relationships need to be built. As the company expands, they need to work with their established channel partners to ensure that channel relationships did not break down. This is especially important for the players who are not the dominant (or channel captain). Companies who are the captain of the channel can be a little bit more indifferent to channel conflict, as they hold the power, usually through unique products or access to the customer base.
3 = If it is common, then is it worthwhile for some firms to minimize the number of and reviews they use?
A company’s use of channels should be evaluated from time to time, as their business model, strategies, and goals and involve. And of course, as the microenvironment shifts as well.
As we have seen, the internet has forced many firms to rethink their channel strategy, particularly as online shopping became far more significant. Therefore, firms may change their channel strategy, based on internal and external environmental changes and evolution.
However, the question asked specifically about channel conflict. In this case, there would be situations where dropping a channel completely maybe a logical outcome of a difficult channel conflict.
As an example, if Coca-Cola had a conflict with a small chain of convenience stores who would frequently discount their products, in order to undercut the major supermarkets, and the supermarkets became quite unhappy. Then, given that it is only a small chain of stores, a simple outcome (if it could not be negotiated) would be to remove the convenience stores as a channel.
4 = What type of firms/products would benefit from using many different distribution channels?
This is a broad question, as many types of firms/products would benefit from a multi-channel structure.
Even a company like Apple, uses a multi-channel structure. And this is despite having their own Apple stores. In addition to direct retailing, Apple will still sell their products through other retailers, such as department stores, specialist computing stores, phone stores, and even supermarkets like Walmart. In addition, they would have their own direct sales force who sell to large businesses, government, and government institutions and departments, and so on.
Obviously any company that relies upon intensive distribution – such as snacks and sodas – need to have a multi channel structure. As per the example above, even service firms (such insurance companies and banks) will operate multi-channel operations.
Typically, we only find small businesses and very specialized niche players who operate with one channel only. This is because a common way of growing the business is to expand the market by channel expansion.
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