From Dissonance to Harmony

From Dissonance to Harmony:
Managing Distribution Relationships
in the Utility Industry
NAAUD National Conference
San Diego, CA
April 2006
Anne T. Coughlan
Kellogg School of Management
Northwestern University
From Dissonance to Harmony: Key Issues
• What is channel harmony or coordination?
• Why bother to coordinate?
• Utility industry distribution “hot buttons”
• Dissonance/conflict
– Types/examples
• Managing conflict to improve channel harmony
– Michaels: a “channel captain”
• Calls to action for your one-on-ones
© 2006 Anne T. Coughlan
What is Channel Coordination?
• A channel is coordinated when its members
(e.g., manufacturer, distributor) act to advance
the goals of the channel, rather than their own
independent goals*
• Coordination thus implies
– Coordinated interests and actions among channel members
– A match with demands of ultimate end-users (e.g., a coop
utility) for channel services
• Coordination does not mean zero conflict!
© 2006 Anne T. Coughlan
*Coughlan et. al. (2006), Marketing Channels, p. 25.
Why Bother to Coordinate Your Channel?
• It’s a lot of work
– Educating your partners
– Adopting new technologies
– Constant communication….
• And it’s risky
– What if your “partner” takes advantage of you after
you’ve made big investments in the relationship?
© 2006 Anne T. Coughlan
But, done right…
• It lowers total distribution costs
• It increases market share and sales
• It helps you and your valuable channel partners
prosper in tough as well as good markets
• What are the challenges to harmony, and the benefits
from it, that utility industry participants have
mentioned?
© 2006 Anne T. Coughlan
Your Coordination Issues, #1a:
Consolidation at Distributor Level
• Before consolidation:
– M can have a “favorite” D in each region
– Two-way loyalty
• D consolidation can mean that M ends up with two
“favorite” D’s in one region
– Then, which should be favored in a particular sales situation?
• D may discover after acquisition that it has not been
getting the same, “favored,” deals as other distributors
in its own regions!
– Æ CONFLICT over domain of benefits (we deserve great
treatment too!)
– Æ MISTRUST in future that we are getting a “good deal”
© 2006 Anne T. Coughlan
Your Coordination Issues, #1b:
Consolidation at Utility (Customer) Level
• How to deal with the situation when a utility
customer acquires another, and then specifies
a particular D across both buying units?
– What can the D do who is losing the account?
– What can the M do who is being “told” what D to
use, even if it isn’t the M’s “favorite”?
• Some of you conclude:
– The only real “channel captain” in the end is… the
utility customer!
– Because the utility customer holds the ultimate
power: the power of the purse
© 2006 Anne T. Coughlan
Your Coordination Issues, #2:
IOUs Outsourcing Distribution
• Some investor-owned utilities (IOUs) that
formerly operated own warehouses and bought
direct from M’s now outsource distribution:
– Manufacturers now face a wedge between them and
the customer: domain of influence issues
• Some IOUs use a “management company” to
run warehousing operations:
– Hard to interact with these new channel members
who have not been in the industry for long, may
have different incentives and norms
© 2006 Anne T. Coughlan
Your Coordination Issues, #3:
Foreign Sourcing
• Commonly-mentioned issue by both M’s and
D’s
• What are M, D, and customer perspectives on
foreign sourcing?
Manufacturer
Distributor
Customer
© 2006 Anne T. Coughlan
Foreign Sourcing (#3): Conflict Generation:
The Distributor Perspective
• Utility customers push for lower prices
• Yet M’s are raising their prices to D’s…
• So, M’s are not seen as passing on savings
from foreign sourcing
– Using as a buffer in light of lower profitability of
domestic manufacturing sites?
• The “squeeze” is on from above and below
• Incentive for some D’s to source from overseas
themselves, as a last resort
© 2006 Anne T. Coughlan
Foreign Sourcing (#3): Conflict Generation:
The Manufacturer Perspective
• Foreign sourcing is a necessary response to
increased costs of other inputs (steel, energy)
• We exert quality control over foreign-sourced
product (no D liability)
• If D instead sources product directly from
overseas:
–
–
–
–
Lower-cost for D up front
But, may get below-standard product
Creates competitive issues for us
And, who pays later on if product is defective?
© 2006 Anne T. Coughlan
Foreign Sourcing (#3): Conflict Generation:
The Customer Perspective
• Short-run results are important (top
management)
• Push to reduce cost (procurement side)
• But still value (and think they can get) reliability
and consistency of supply, even from offshore
sources (engineering side)
• So, disharmony even within the utility
• Belief by some that reduced price doesn’t
mean lower service levels
© 2006 Anne T. Coughlan
What If No Conflict Resolution on Offshore
Sourcing? (#3)
• Risk of out-of-stocks in
emergencies
– Katrina
– Ice storms
• Risk of loss of domestic
production capability
– Particularly acute for specialty
products that are lower-volume
When?
ASAP!!!
• Risk of long-term harm to
relationship with customer
(who believes there will be
no service interruptions)
© 2006 Anne T. Coughlan
Pictures: Highline Notes, Jan. 2006
(Cass County, N. Dakota)
Implications for Conflict Types in the
Utility Industry
• GOAL:
GOAL Incompatibility of goals, aims, or
values among channel members
• DOMAIN:
DOMAIN Disagreement over relevant
domains
– Rights to the revenues/profits of the channel
– Responsibilities for running the channel
• P.O.R.: Discrepancy in channel members’
perceptions of reality
© 2006 Anne T. Coughlan
Sources of Channel Conflict: Goals
• Incompatibility of goals, aims, or values among
channel members is everywhere in distribution
• If a “zero-sum game,” then any gain for me is
achieved only at a loss to you
– Little chance in such a system to induce your “partner” to
invest in your profit improvement!
– Goal conflict is almost a given here
• But, is this the “only game in town”?
© 2006 Anne T. Coughlan
An Antidote to Goal Conflict?
• But, if you can play a positive-sum game, then
gains can be shared:
– Everyone can be made at least as well off as they were before
– Thus, incentive to increase the total channel profit pie!
– How to create the possibility for such gains?
© 2006 Anne T. Coughlan
Sources of Channel Conflict: Domain
• The domain of benefits:
• Population to be served
• Territory to be covered
– The domain of cost-bearing:
• Functions and duties to be performed
by channel members
• Technology to be used in marketing
© 2006 Anne T. Coughlan
Sources of Channel Conflict:
Perception of Reality Conflict
© 2006 Anne T. Coughlan
Sources of Channel Conflict:
Perception of Reality Conflict
© 2006 Anne T. Coughlan
Sources of Channel Conflict:
Perception of Reality Conflict
© 2006 Anne T. Coughlan
Can You Really See the Full Picture?
© 2006 Anne T. Coughlan
Resolving POR Conflict by Taking
the Other Party’s Point of View
© 2006 Anne T. Coughlan
Who Can Be the
Channel Coordination Leader?
• Any distribution channel member can be the leader
• Leadership in supporting/creating channel
coordination requires:
– Ability to recognize the opportunity
– Ability to construct a program of action that will seize the
opportunity
– And perhaps most importantly, ability to market the
opportunity to distribution partners and gain buy-in
• How can you “seize the opportunity”?
– Michaels as an example of developing the channel captain
solution
© 2006 Anne T. Coughlan
Generating Gains from Coordination: Michaels
• The largest craft retail chain in the U.S. and world
– Yet only 10% of industry sales
• Recognizing the opportunity: Seeks to expand to 1,000
stores, from a few hundred stores just 7-8 years ago
• Program of action: Suppliers need to match its
increasing need for distribution sophistication
• Problem in marketing the opportunity:
– > 1,000 vendors, supplying 40,000+ SKUs to stores
– Vendors were small. “artsy-craftsy”
– Many without computerized operations at all
© 2006 Anne T. Coughlan
Source: “Michaels Craft Stores: Integrated Channel Management and VendorVendorRetailer Relations,”
Relations,” Anne T. Coughlan, Kellogg Case Series, © 2003.
Didn’t Vendors “Get It?”
• Clear vendor benefits of upgrading their practices:
–
–
–
–
Faster turns would mean higher sales per time period
Faster payment
Fewer returns
Better info for vendor production planning
• But marketing the opportunity faced two key
constraints:
– Small “artsy” vendors were incapable of the supply-chain
behaviors that Michaels wanted them to perform
– Small vendors were unaware of the value of doing so
• Can coercion work here? Why/why not?
© 2006 Anne T. Coughlan
Michaels’ Solution
• Instead of coercing the vendors, Michaels
“wooed” them with education
– Vendor training manual
– Vendor Flow Training course on-site at
Michaels (a picture is worth 1,000 words)
– Show the gains to vendors
© 2006 Anne T. Coughlan
Results:
• With a few hiccups (some coercion eventually
necessary), all Michaels vendors now comply,
significantly improving the efficiency of their
distribution operations
• Many suppliers actually praise Michaels for “making us
a better vendor”
• So suppliers themselves have become convinced of
the joint benefit and also of the external benefit of
being a “good” supplier to Michaels (it’s a positivesum, not a zero-sum, game)
© 2006 Anne T. Coughlan
From Michaels to More General Conflict
Management Strategies: Link to Your Insights
• Intensive communication can help control
conflict:
– Communication between M and D at top level of both companies
(your 1 on 1’s)
– Monthly/quarterly strategic visits
– Yearly vendor/distributor relationship reviews
– Exchange of personnel programs: e.g., councils of a
manufacturer and its major distributors
– Joint membership in trade associations, like NAAUD
© 2006 Anne T. Coughlan
From Michaels to More General Conflict
Management Strategies: Link to Your Insights
• Intensive communication can help control conflict
• Use power sources at your command to defuse
conflict
– Education and expertise sharing
– The offer of rewards
– Owning the relationship with the customer
© 2006 Anne T. Coughlan
From Michaels to More General Conflict
Management Strategies: Link to Your Insights
• Intensive communication can help control conflict
• Use power sources at your command to defuse conflict
• Success means adoption of common channel
goals
– “A winning proposition for both parties” – can’t be just one party
who gains from the channel
– Positive-sum game, not a zero-sum game
© 2006 Anne T. Coughlan
What Michaels Tells Us About Successful
Channel Captaincy
• Develop a clear vision of how to reach superior
channel performance
• Communicate the vision to partners
(sometimes a hard job!)
– Compelling advantage for all partners, not just you
• Use levers of power to achieve productive
channel change
– Preview and manage natural channel conflict in the
face of potential change
© 2006 Anne T. Coughlan
Your Calls to Action in One-on-Ones
• Coordinating with your channel partners is:
– Hard work
– But worth it if done well!
• Your challenges to coordination: recognizing,
managing, and ultimately preventing conflict
© 2006 Anne T. Coughlan
Calls to Action, continued…
• Each of you has an imperative to:
– Add value to the whole channel’s performance
– Make that value clear both to other channel partners
and ultimately to the end users you serve
– Be flexible in the face of change: where’s the best
match between your capabilities and the relevant
target end-users’ needs?
– “Know the top management at your channel
partners’ companies, and provide service, SERVICE,
SERVICE!!!”
© 2006 Anne T. Coughlan
Calls to Action, continued…
• You can’t achieve maximum channel
performance without cooperation with your
channel partners
– So, don’t enter into discussions thinking “It’s us
versus them”
– Instead, think “How can we together achieve more in
the market?”
– Or, as a couple of you suggested: “Get B2B”
• NOT “Business to Business”
• BUT …
© 2006 Anne T. Coughlan
Calls to Action, continued…
• You can’t achieve maximum channel
performance without cooperation with your
channel partners
– So, don’t enter into discussions thinking “It’s us
versus them”
– Instead, think “How can we together achieve more in
the market?”
– Or, as a couple of you suggested: “Get B2B”
• NOT “Business to Business”
• BUT “BELLY
© 2006 Anne T. Coughlan
TO BELLY” !!
For More Information…
Marketing Channels
7th edition (2006)
by Coughlan et al.
(pub.: Prentice-Hall)
Available on amazon.com
(check “other new/used”)
Questions? Contact a-coughlan@kellogg.northwestern.edu
© 2006 Anne T. Coughlan
Thank You!
© 2006 Anne T. Coughlan