from dissonance to harmony v6 4-5-06 - naaud · from dissonance to harmony: ... solution ©2006...

From Dissonance to Harmony:From Dissonance to Harmony:Managing Distribution Relationships Managing Distribution Relationships

in the Utility Industryin the Utility Industry

NAAUD National ConferenceNAAUD National ConferenceSan Diego, CASan Diego, CA

April 2006April 2006

Anne T. CoughlanAnne T. CoughlanKellogg School of ManagementKellogg School of Management

Northwestern UniversityNorthwestern University

© 2006 Anne T. Coughlan

From Dissonance to Harmony: Key IssuesFrom 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


What is Channel Coordination?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!

*Coughlan et. al. (2006), Marketing Channels, p. 25.


Why Bother to Coordinate Your Channel?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?


But, done rightBut, 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?


Your Coordination Issues, #1a:Your Coordination Issues, #1a:Consolidation at Distributor LevelConsolidation 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!– CONFLICT over domain of benefits (we deserve great

treatment too!)– MISTRUST in future that we are getting a “good deal”


Your Coordination Issues, #1b:Your Coordination Issues, #1b:Consolidation at Utility (Customer) LevelConsolidation 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


Your Coordination Issues, #2:Your Coordination Issues, #2:IOUs Outsourcing DistributionIOUs 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


Your Coordination Issues, #3:Your Coordination Issues, #3:Foreign SourcingForeign Sourcing

• Commonly-mentioned issue by both M’s and D’s

• What are M, D, and customer perspectives on foreign sourcing?

Customer

Manufacturer Distributor


Foreign Sourcing (#3): Conflict Generation:Foreign Sourcing (#3): Conflict Generation:The Distributor PerspectiveThe 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


Foreign Sourcing (#3): Conflict Generation:Foreign Sourcing (#3): Conflict Generation:The Manufacturer PerspectiveThe 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?


Foreign Sourcing (#3): Conflict Generation:Foreign Sourcing (#3): Conflict Generation:The Customer PerspectiveThe 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


What If No Conflict Resolution on Offshore What If No Conflict Resolution on Offshore Sourcing? (#3)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• Risk of long-term harm to

relationship with customer (who believes there will be no service interruptions)

When?ASAP!!!

Pictures: Highline Notes, Jan. 2006(Cass County, N. Dakota)


Implications for Conflict Types in the Implications for Conflict Types in the Utility IndustryUtility Industry

•• GOALGOAL: Incompatibility of goals, aims, or values among channel members

•• DOMAINDOMAIN: Disagreement over relevant domains– Rights to the revenues/profits of the channel– Responsibilities for running the channel

•• P.O.R.P.O.R.:: Discrepancy in channel members’perceptions of reality


Sources of Channel Conflict: GoalsSources 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”?


An Antidote to Goal Conflict?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?


Sources of Channel Conflict: DomainSources 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


Sources of Channel Conflict: Sources of Channel Conflict: Perception of Reality ConflictPerception of Reality Conflict


Can You Really See the Full Picture?Can You Really See the Full Picture?


Resolving POR Conflict by Taking Resolving POR Conflict by Taking the Other Partythe Other Party’’s Point of Views Point of View


Who Can Be the Who Can Be the Channel Coordination Leader?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


Generating Gains from Coordination: MichaelsGenerating 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

Source: Source: ““Michaels Craft Stores: Integrated Channel Management and VendorMichaels Craft Stores: Integrated Channel Management and Vendor--Retailer Relations,Retailer Relations,”” Anne T. Coughlan, Kellogg Case Series, Anne T. Coughlan, Kellogg Case Series, ©© 2003. 2003.


DidnDidn’’t Vendors t Vendors ““Get It?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?


MichaelsMichaels’’ SolutionSolution

• 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


Results: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 positive-sum, not a zero-sum, game)


From Michaels to More General Conflict From Michaels to More General Conflict Management Strategies: Link to Your InsightsManagement 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



• 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



• 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


What Michaels Tells Us About Successful What Michaels Tells Us About Successful Channel CaptaincyChannel 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


Your Calls to Action in OneYour Calls to Action in One--onon--OnesOnes

• Coordinating with your channel partners is:– Hard work– But worth it if done well!

• Your challenges to coordination: recognizing, managing, and ultimately preventing conflict


Calls to Action, continuedCalls 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!!!”



• 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 …



• 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 TO BELLY” !!


For More InformationFor More Information……

Marketing Channels7th edition (2006) by Coughlan et al. (pub.: Prentice-Hall)

Available on amazon.com(check “other new/used”)

Questions? Contact [email protected]


Thank You!Thank You!

from dissonance to harmony v6 4-5-06 - naaud · from dissonance to harmony: ... solution ©2006...

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